Much is being made about the expanding consumer credit balances. This should be promising to the economy as it means consumers are probably spending more.
However, expanding consumer credit is bad news for banks if delinquencies and defaults also rise.
Citi’s specialty finance analyst Donald Fandetti warns that credit card delinquencies probably spiked in January. However, much of the rise, he notes, will have been due to seasonal factors. From his note to clients:
On Wed, Feb 15, the major card issuers will release their January Master Trust (MT) results. Historically, January has shown one of the largest m/m increases in delinquency rates due to seasonality, which reflects 1) denominator effect as card holders pay down holiday balances and 2) consumers get stretched during the holidays and some tend to get sloppy on payments. We estimate that delinquencies have historically increased 10-20 bps m/m in January (see Figure 1 for monthly analysis). And card balances tend to decline 2-3% from the prior month. For perspective, if we simply hold card issuer delinquency $’s steady into January and lower balances for seasonality, it boosts delinquency rates ~10 bps just from the denominator effect alone. In summary, we recommend that investors look through the seasonal increase and buy the stocks on any weakness around Master Trust day. And remember that as we get closer to April, delinquencies improve nicely on tax refunds
Fandetti also notes that economic metrics are improving that will likely reduce the risk of a major rise in delinquencies:
While seasonality creates noise in the delinquency stats, we believe consumer credit remains quite healthy and charge off’s for the industry are unlikely to increase anytime soon. For instance, initial US jobless claims were only 367K in the week ending January 28. This follows the two prior weeks of claims <400K. The four-week moving average dropped to 376K. In addition, other employment data points such as non-farm payrolls +243K in Jan and unemployment falling to 8.3% provide further support that consumer credit should remain solid. Finally bankruptcy statistics also remain tepid with 101K filings YTD, down 14% y/y.
Photo: Citi Investment Research & Analysis