Credit Card Delinquency to Peak in 2022

Loan delinquency across the board is projected to rise sharply in the next five years. The outcome of the 2020 U.S. election cycle will have a unprecedented and profound impact on the U.S. economy, the global economy, and the payment card industry through 2025. Solid projections point to early stage credit card delinquency among the nation’s top issuers to exceed 3.00% before 2022.

With an unsustainable U.S. budget on the table and declining tax revenue, a GOP-led government could trigger another prolonged recession. A DEM-led government may delay or shorten a recession by unraveling the past four years of politically expedient economic decisions. However, dealing with U.S. healthcare issues will still leave the biggest threat, an unsustainable budget, on the table.

The China trade war, a looming, long-overdue global recession, as well as the current coronavirus scare could send all credit card metrics off the map in 2020 and 2021. A “Greater Recession,” triggered by a catastrophic event, remains stronger possibility each day.

Going forward there are three key considerations:

(1) The central tendency of U.S. PCE and inflation growing from 1.45% in 2019, to 1.85% in 2020, 2.05% in 2021 and 2.10% in 2022, will drive U.S. payment card PDV (purchase dollar volume) on a steady upward trend.

(2) The unemployment rate rising to 3.7% in 2021 and 4.2% in 2022 coupled with the 2019 surge in consumer revolving credit, will likely push early stage delinquency rates above 3.00% in 2022, followed by a slow retrenchment through 2025.

(3) The sharp decline in U.S. real GDP growth underway since 2018, from 2.93% to 2.32% last year, and likely to drop to 2.20% in 2020 and 2.00% for 2021, may not bottom out till 2024.

Fourth-quarter card charge-offs among the Top 4 U.S. bank credit card increased modestly from the prior quarter and up a smidgen from one-year ago. Credit card charge-offs among the nation’s Top 4 credit card issuers decreased 7 bps (basis points) sequentially in the fourth-quarter (4Q/19), and up 3 bps year-on-year (YOY).

The Top 4 (Chase [JPM], Capital One [COF], Bank of America [BAC], Citibank [C]) reported an aggregate charge-off ratio of 3.37% for 4Q/19, compared to 3.30% for 3Q/19 and 3.34% for 4Q/18. For the fourth-quarter of 2015 the Top 4 posted an average charge-off ratio of 3.12%.

Loan loss reserves for credit card or consumer banking among the Top 4 increased 9.1% YOY. Chase boosted credit card loan loss reserves by 9.6% from one-year ago, and Citibank loan loss reserves rose by 11.5%. Capital One and Bank of America likewise boosted loan loss reserve for the fourth-quarter.

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