Garnet Capital Advisors Blog

April 4, 2018

Small Banks' Charge-Off Rates on the Increase

Excerpt:

Credit card charge-off rates in smaller banks rose 60% during the last quarter of 2017 compared to the last quarter of 2016, according to data from the United States Federal Reserve. Charge-offs reached 7.2% versus 4.5% in the year-prior period for banks whose assets were less than $10.4 billion. The culprit? Looser loan standards at smaller banks, as they pursued more credit card customers. Larger banks, who pursued more credit card customers as well, were able to capture more affluent customers and are not seeing any spike in charge-offs.

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Credit card charge-off rates in smaller banks rose 60% during the last quarter of 2017 compared to the last quarter of 2016, according to data from the United States Federal Reserve. Charge-offs reached 7.2% versus 4.5% in the year-prior period for banks whose assets were less than $10.4 billion. 

Small banks have pursued credit card issuance by lowering credit standards.

Lower Credit Standards Lead to Higher Charge-Offs

The reason? Banks of all sizes have been aggressively issuing credit cards as part of new business. Larger banks courted higher net worth customers with rewards. Smaller banks, which can’t afford pricey cash-back offers and reward points, often competing by relaxing their credit standards to sign up new credit card borrowers. 

As a result, more small bank credit card customers are defaulting on repayment and going into charge-off. For small banks, the recently announced charge-off figure is the highest it’s been in 8 years. 

For larger banks, by contrast, the charge-off rate stands at 3.5%, much lower than the 10.6% charge-off rate they hit in 2010.

Smaller banks are experiencing an increase in charge-offs.

Rising Debt in a Strong Economy a Concern

The charge-off rate in small banks may be an indicator of consumer distress to come, however, as small banks’ results often serve as a harbinger of a slackening economy. 

Such a sharp increase in charge-offs is worrisome partly because it is occurring in the middle of a robust economy and low unemployment. A downshift in the economy and rising unemployment might well be expected to result in an even worse picture. In addition, interest rates have been rising and are expected to continue on an upward curve at least through 2018, making consumer payments higher.

Last year, outstanding credit card debt reached $1 trillion. The number of Americans who have credit cards, at 171 million, is at a 10-year high. 

While some observers are highly concerned at the sign of charge-offs making such a huge leap in a strong economy, other observers see no cause for concern. Some feel that, as the economy expands, consumers whose propensity to miss payments are higher are more drawn into the credit card market as a general rule.

Let a Seasoned Loan Advisor Help

As banks seek to maximize profits and minimize charge-offs, they may need to rebalance their loan portfolios, investing in high-quality loan assets and selling underperforming ones. 

Seasoned whole loan brokers at Garnet Capital can help small, midsized, and large banks invest in superior quality loan assets to maximize their portfolios and divest underperformers to minimize risk.

Interested in how Garnet can help you? Browse our white papers today.