The big worry for banks after the turmoil that roiled the industry in the spring was commercial real estate. Now there is a new concern: credit card delinquencies.
Overall credit card debt topped $1 trillion as of the end of the second quarter, according to the Federal Reserve Bank of New York. Credit card delinquencies climbed to 7.2%, reaching 2019 levels. Auto loans rose to 7.3%, also reaching pre-pandemic levels.
New warnings about consumers came this week from several retailers who said customers were already having trouble paying off their credit card debt.
Macy’s (M) reported card sales dropped 36% from the prior year with the retailer’s CFO warning "higher bad debt assumptions and write-offs." Footlocker (FL) fell 28% Wednesday after the retailer suspended its dividend, citing a need to compete for "price-sensitive consumers."
The return of student loan repayments in October could also make financial matters worse for some consumers, forcing them to pull back on their spending in other areas such as credit card repayments.
Loan losses from credit cards and auto loans are "the big issue that certain banks have to worry about" now instead of commercial real estate, Dick Bove, a bank analyst for Odeon Capital, told Yahoo Finance.
Because of these concerns Bove downgraded Capital One (COF), which relies heavily on credit card income, to a sell rating earlier this year. He did the same to online bank Ally Financial (ALLY), which has a lot of auto loans.
“I think we’re going to see a wave of loan losses for both these companies in these areas,” he said.
To be sure, credit card loans make up only a small portion of the total loans and leases and total assets held by US commercial banks. As of the week ending August 9, according to the Federal Reserve, credit card loans accounted for 8.2% of all loans and 4.4% of all assets, respectively.
And even though credit card delinquencies at banks have been steadily rising since the second half of 2021, delinquencies had previously fallen during the pandemic to their lowest rate since 1991, according to Fed data.
“We're coming off really low delinquencies prior to this. So you're going to see a natural uptick,” Smead Capital Management CEO Cole Smead told Yahoo Finance.
Alexander Yokum, a bank analyst for CFRA, said he is "not that concerned" about how rising card balances and delinquencies could impact the lenders he follows "with unemployment under 4%."
"The consumer is still in pretty good shape," Rick Rieder, BlackRock's Chief Investment Officer of Global Fixed Income told Yahoo Finance, noting that underneath the surface consumers on the "lower end" may be facing the brunt of current financial difficulties.
To be sure, there is little doubt banks are bracing for losses to increase. JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) increased the provisions they set aside for possible future loan losses by 17% between the first and second quarter.
For the first half of the year, they have accumulated $13.3 billion, a 42% increase compared to the first half of 2022.
Some banks are also pulling back on this type of lending. Consumer loan growth at U.S. commercial banks in July was 5.9%, a decline from 7.3% rate in June and 10.8% at the start of the year.
For credit card and other revolving consumer plans, growth has cooled to half of its pace from a year ago.
"The trend is very negative," Yokum said of the rising delinquencies in credit cards. "If elevated, interest rates end up pushing the economy into recession. That's a much bigger issue, but that the case of a recession has been receding, not really increasing over the last few quarters," he added.
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