Garnet Capital Advisors Blog

October 25, 2017

Banks Hike Loan Loss Provisions on Uptick in Consumer Delinquencies Combined with Better than Expected Profits

Excerpt: Consumer delinquencies rose in September, even as major U.S. banks scored record profits. While the uptick is small and not near 2008-2009 levels, big banks are also hiking their provision for loan losses in the face of record U.S. consumer debt levels.  

The S&P/Experian Consumer Credit Default Indices registered an uptick in consumer delinquencies overall through September of this year. The indices are designed to show changes in default on consumer credit. The composite rate now stands at 0.88%, two basis points higher than the previous month and four basis points higher than the previous year at the same time. 

Mortgage delinquencies ticked upward in September...

Individual components within consumer debt showed mixed results. Defaults on mortgages, at 0.66%, rose month over month as well, by one basis point. Auto loan defaults rose to 1.05%, 10 basis points above the previous month. Credit cards defaults rose 0.39% to stand at 3.15%.

The upward moves are small. However, observers also note that consumer debt, particularly for credit cards and auto loans, may rise in the future due to the late summer and early fall hurricanes in Texas and Florida. Insurance damages are still being tabulated, so consumers cannot currently be sure of how much out-of-pocket expenses they may have to pay to repair hurricane damage. Consumers may be looking at car replacement, home repair, and perhaps lost wages all at once in ways that will place pressure on their pocketbooks.

...while credit card debt reached record levels.

Banks Add to Delinquency Reserves While Reporting Record Profits

The upticks certainly haven’t hurt profits in the banking industry. JP Morgan Chase, the nation’s largest bank, reported record profits for the third quarter, with better than expected loan demand driving profits up 7%. The consumer business alone reported a 16% rise in profit and double-digit gains in credit cards.

Citigroup’s profits were also up more than forecast in the quarter, although less robustly than JP Morgan Chase’s. Altogether, profits for the nation’s four leading banks totaled $21 billion in the third quarter.

Yet there are also signs that rejoicing over stellar quarterly profits is not the only thing banks are doing. They are also adding to delinquency reserves as delinquencies climb for the third straight month. 

JPMorgan added 14% to its provisions for credit losses in the third quarter, perhaps spurred by a rise in its September delinquencies of 1.22%. Citigroup hiked its provisions for credit losses 15%. Other leading banks also saw delinquencies rise. Bank of America’s, for example, were up 1.56% on the month. 

The delinquencies are in part driven by banks’ drive to increase profits by going deeper into the pool of borrowers with less attractive credit ratings. Altogether, consumer credit card debt alone stands at $1 trillion, its highest-ever level. 

While the delinquency levels are far below those reached during the 2008-2009 financial crisis, banks will do well to keep an eye on their levels of loan loss provisions and their loan portfolios.

Experienced Loan Advisors Add Strength to Bank Portfolios

While consumer credit delinquencies are rising in tandem with bank profits, the largest and smartest lenders are preparing for all eventualities.

Buyers of portfolios need to be aware of portfolio credit quality and duration. Holders of loans can look to loan sales to accelerate cash flow of nonperforming accounts should the need arise.

The seasoned loan sale advisors at Garnet can help with any environment affecting your loan portfolio. Browse our white papers to learn more.