Banks: Con­sumer loan costs drop

Three gi­ant banks say costs are fall­ing de­spite ris­ing in­ter­est rates.

The Atlanta Journal-Constitution - - BUSINESS - By Jenny Su­rane, Claire Bal­len­tine and Michelle F. Davis Bloomberg News

When in­ter­est rates tick higher, con­sumers car­ry­ing too much debt start to de­fault. It’s the nat­u­ral as­sump­tion, but Amer­i­cans keep meet­ing their obli­ga­tions.

Three of the largest U.S. banks — JPMor­gan Chase, Wells Fargo and Cit­i­group — an­nounced Fri­day that their costs for bad loans are fall­ing. The same strong econ­omy push­ing the Fed­eral Re­serve to raise rates is help­ing house­holds keep cur­rent on their grow­ing mound of debt.

JPMor­gan’s pro­vi­sion for bad loans was a half-bil­lion dol­lars less than an­a­lysts es­ti­mated as one mea­sure of trou­ble in its con­sumer port­fo­lio fell to the low­est level in more than a decade. Wells Fargo and Cit­i­group both cut the amounts they set aside for con­sumer loan losses by at least 13 per­cent.

“Most of the con­sumer credit writ­ten since the great re­ces­sion has been pretty damn good, and our book is ex­tremely good,” JPMor­gan Chief Ex­ec­u­tive Of­fi­cer Jamie Di­mon said. “Of course, one day there’ll be a cy­cle, one day credit losses will be go­ing up.”

A year ago, many ob­servers thought the tide al­ready was turn­ing as four of the largest con­sumer lenders boosted pro­vi­sions. An­a­lysts and in­vestors wor­ried that mom and pop would strug­gle to keep up with bills ac­cru­ing higher in­ter­est, or that they would de­fault on car loans as re­sale val­ues slumped. But re­straint in lend­ing, im­prove­ment in the la­bor mar­ket and tax cuts held those sce­nar­ios at bay.

“It’s a com­bi­na­tion of peo­ple be­ing more dis­ci­plined and banks bet­ter manag­ing their bal­ance sheets,” said Mark Doc­to­roff, co-head of Mit­subishi UFJ Fi­nan­cial Group Inc.’s fi­nan­cial in­sti­tu­tions group. “It’s much harder now to get a con­sumer loan.”

The boon in credit qual­ity is per­haps the most di­rect way banks are ben­e­fit­ing from the lat­est stages of the eco­nomic re­cov­ery. In­dus­try­wide loan growth hasn’t been as strong as ex­pected in the wake of cor­po­rate tax cuts, and higher in­ter­est rates have been a mixed bag as a flat­ten­ing yield curve — nar­row­ing the dif­fer­ence be­tween short- and long-term in­ter­est rates — limited the boost to mar­gins.

Some an­a­lysts still see credit costs creep­ing up next year. Gold­man Sachs, which jumped into the con­sumer space with on­line per­sonal loans, re­cently tapped the brakes on that fast-grow­ing busi­ness on con­cern that delin­quen­cies would rise.

And to be sure, banks said that within re­tail busi­nesses, they’re

brac­ing for more de­faults on credit cards.

JPMor­gan’s al­lowance for con­sumer loan losses, meant to cover write-offs over com­ing quar­ters, dropped to $9.1 bil­lion, less than half what it was six years ago. Within that, the bank in­creased the amount set aside for credit cards to $5.03 bil­lion, the high­est since 2012.

Cit­i­group’s net credit losses in its branded card busi­ness in­creased 5 per­cent to $644 mil­lion, or 2.9 per­cent of the port­fo­lio. The bank has warned that met­ric could climb to 3.25 per­cent over the medium-term as new cus­tomers be­gin to de­fault. Still, it’s a far cry from 2009, when the com­pany wrote off more than 10 per­cent of its port­fo­lio.

Shares of Visa and Master­card, which both col­lect fees for han­dling trans­ac­tions, closed up 4.7 per­cent and 5 per­cent, re­spec­tively, on Fri­day. An­a­lysts pointed to spend­ing lev­els, with KBW’s San­jay Sakhrani telling clients in a note that vol­ume trends from the three banks were in-line to bet­ter than ex­pected for the card net­works.

The ques­tion now is whether Amer­i­cans will keep shop­ping re­spon­si­bly and pay­ing their bills.

“The con­sumer has to be watched, but I think we are go­ing to go into a very good re­tail sea­son in the hol­i­days,” with banks ben­e­fit­ing, Doc­to­roff said. “Hope­fully this will cor­rect some about the con­sumer be­ing stressed.”

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