I am not worried about banks or investors in securities backed by high-risk credit cards. If they get beaten up, fine. But what does this fork tell us about consumers?
By Wolf richter for WOLF STREET.
The credit card balance rate that has a delinquency of 30 days or more in the approximately 4,500 commercial banks that are smaller than the top 100 banks increased to 7.05% in the fourth quarter, the highest delinquency rate in the data dating back to the 1980s red line).
But in the 100 largest banks, the delinquency rate of credit cards was 2.48%, which kept the general delinquency rate of credit cards in all commercial banks at 2.7% (line blue), although it was the highest since 2012, according to the Federal Reserve. What is happening here, with this bifurcation of delinquency rates and what does that tell us about consumers?
Clearly, those consumers who have obtained credit cards in smaller banks are in a lot of trouble and are falling behind at a historically high rate. But consumers who obtained their credit cards in large banks, attracted by 2% cash back offers and other benefits that are being strongly promoted to consumers with higher credit scores, do not feel the pain.
An equally disturbing trend is occurring with car loans. Loans for severely delinquent cars jumped to 4.94% of Total car loans and leases exceptional. This is higher than the delinquency rate in the third quarter of 2010 amid the worst unemployment crisis since the Great Depression. On closer inspection, there was that fork again; Preferentially rated loans had historically low delinquency rates; but a shocking 23% of all high-risk loans were over 90 days past due.
During the financial crisis, late payments on credit cards and car loans skyrocketed because more than 10 million people had lost their jobs and couldn't make their payments.
But these are the good times, with the unemployment rate near historical lows. And yet, there are these delinquency rates in the subset of credit cards and car loans. It means that these people are working, YThey are falling behind with their debts.
Consumers with subprime credit scores (below 620) can still obtain credit cards, but in subprime terms, that is, interest rates of 25% or 30% or more.
These rates arrive at a time when, according to the FDIC, the average financing cost of the banks was around 1.0%. The difference between the average cost of financing a bank and the interest it charges is its net interest margin. For banks, high-risk credit card balances, with interest rates of 30%, are the most profitable assets that exist.
To obtain these benefits, banks assume great risks. Even when a portion of those credit card accounts has to be canceled and sold for pennies to a collection agency, they generally remain profitable. In addition, banks discharge part of the subprime risk to investors by securitizing these subprime credit card loans in asset-backed securities. And investors love them and pursue them for the slightly higher return they offer.
So I am not worried about banks or investors. If they receive a beating, so be it. But what does it tell us about consumers?
The 100 largest banks have a delinquency rate of only 2.48%, which is low according to historical standards. With their sophisticated marketing, they aggressively pursue consumers with high credit scores and high incomes, and to obtain them, large banks offer great benefits, so a war of deals for these consumers with high credit scores broke out, with "2 % cash back on each purchase "and other benefits that small banks cannot offer.
These large banks have the majority of customers and most credit card balances (assets for banks). Their special offers draw most consumers with higher credit scores. They also issue credit cards to consumers with subprime credit scores. But since these large banks have the majority of top-notch customers, their high-risk customers, when they don't pay, don't weigh much in the mix.
Smaller banks cannot offer the same incentives and do not have the marketing resources that large banks have. But customers with subprime qualification are easy to deliver with a credit card that comes with few incentives and charges 30% interest. And those credit card balances, which produce 30% interest income, work wonders for the end result of a small bank. Proportionally, these small banks end up with more high-risk clients. And in this way, they become an indicator of delinquency of subprime credit cards.
So why do these delinquencies soar now? We have not seen millions of people fired. These are the good times.
It is a sign of the strong fork of the economy for consumers. A group of consumers is fine. They have increasing incomes and can afford to rising housing prices, the rising costs of medical care and the rising prices of new vehicles. These price increases are not reflected in inflation measures. For example, him The price of a Ford F-150 XLT has soared 163% since 1990 while the Official CPI for new vehicles during the same period it has increased by only 22% thanks to the "hedonic quality adjustments" and other adjustments (here is my truck price index chart that overlaps both)
The same with used cars. The official CPI for used cars has declined by 11% since 1995, an incredible feat of hedonic quality adjustments, as real The prices of used cars have skyrocketed since 1995.
There are other consumers whose incomes have not moved much, perhaps increased in line with the CPI, but the CPI does not reflect the real increases in the prices of cars, homes and other items. Everything great they are trying to buy, rent or use has exploded in price: new and used vehicles, housing, medical care, education, etc. And those consumers, although they are working hard, are under pressure. That is the fork.
These are the people who are hung. They have work but live from one salary to another, and not because they are wasting but because, at their level of economy, the prices of basic goods and services have escaped them.
And this can happen overnight, for example, when the owner increases the rent by 15%, or when the car becomes a lot without remedy and has to be replaced, or when the insurance premium jumps by 25 %, or when the child ends up in the emergency room. Or a combination And suddenly, there is no money left to make the minimum payment on the credit card.
And this happens while people are working. This subset of consumers who are being squeezed is growing, and their problems are growing, and their delinquencies of credit cards and car loans are reaching the stratosphere as never before, while many other consumers have the best years of their lives. , savoring the "speculative energy" out of control the ups and downs in the stock market and the rising prices of their homes, holiday homes and investment properties. And that is the fork that we are seeing in the previous table.