As Big Banks Profit, Small Bank Credit Card Defaults SpikeMark Melin
As smaller banks have seen credit card loss rates surge, loss and loan rates at some of the most significant banks are up only slightly. Why the differential? In part, it has to do with the premiums being offered to credit card holders – and who can and cannot afford to give them out to prime users. The loss rate changes haven't impacted large banks yet, but it is the smaller banks which are often the economic harbinger.
Small bank charge-off rates spiked to 7.2% on average during the fourth quarter of 2017; Federal Reserve data shows, up from 4.5% on a year over year basis.
Small banks, with under $10 billion in assets, have been particularly hard hit compared to the massive banks, which is running at 3.5% over the same period. That number had spiked to 10.6% in 2010.
In the early part of the market expansion, banks had made pushes to offer new credit cards to consumers with high credit cards. The marketing appeals often enticed people with valuable cash rewards and points, a strategy that only the larger and more well-capitalized banks could offer.
Small banks, meanwhile, chose a different path. Without the ability to lavish new cardholders with rewards, they instead went after consumers with lower credit scores. This risky demographic is now seeing charge-off rates spikes.
But the larger banks don’t appear to be having the same problems.
A recent Credit Suisse report, citing monthly updates posted by the credit card issuer master trust, while noting a slight uptick.
“The current low levels of consumer leverage and unemployment remain a net positive core credit quality indicator,” Susan Roth Katzke write in a March 15 report. “Month-to-month loss rates and delinquency rates are both up on average—no more so than is already consistent with expectations for a modest and manageable lift in loss rates as credit costs normalize.”
Bank of America's loss rate was among the higher of the large banks, increasing 20 basis points with delinquency rates up just two basis points, a move attributed to timing a mid-February card securitization.
“The stable delinquency rate would appear more indicative of core credit trends in the portfolio,” Katzke noted, pointing to a fourth-quarter 2017 average. The first quarter loss rate, meanwhile, is up ten basis points while the delinquency rate is up seven basis points.
The Citi master trust, meanwhile, posted a 40 basis point month over month increase in loss rates and a two basis point month over month decrease in delinquency rates. “This master trust tends to be more volatile, so we focus on three-month averages,” Katzke observed. On a quarter over quarter basis, the first quarter loss rate is down 11 basis points while the delinquency rate is up three basis points.
JPMorgan, meanwhile, reported master trust loss rate in February decreased 12 basis points, the report noted, with the delinquency rate up 3 basis points.
“The health of the consumer is critical to the manageability of our banks' aggregate credit costs,” the report noted. “The consumer debt service burden and unemployment trends (both of which continue to be low, supporting confidence in the health of the consumer).”
While the significant bank master trust loss rates represent 40% of aggregate credit card debt outstanding, will this pristine situation persist?
Robert Hammer, founder and head of credit card consultancy R.K. Hammer, thinks the small banks are a harbinger “of a downturn to come.” The big question is: when the little banks sneeze will the large banks eventually catch a cold?