Banks Concerned As Charge-Offs Hit A Four-Year High

Charge-offs have hit a four-year high — and banks, markets and economy watchers are keeping close tabs on what appears to be the reversal of a six-year trend.

As of Q2, charge-offs increased to 3.29 percent, the highest level seen in the last four years, according to Fitch Ratings.  The second quarter of 2017 also marked the fifth consecutive year-over-year increase in the charge-off rate, indicating something of an ongoing trend at this point.

And, unlike previous quarters where the losses were found more at banks specializing in subprime issuing, all eight of the nation’s largest issuers — including J.P. Morgan Chase & Co., Citigroup Inc., Capital One and Discover Financial Services — saw increases. And those increases picked up notably during the first half of the year, meaning that consumer pullback may be on the way.

The good news is that the news isn’t worse — banks saw charge-offs hit 10 percent in 2010 during the wind-down of the crisis, a situation lenders do not believe is likely to return. Right now the situation is currently viewed as a course correction after years of abnormally low numbers of charge-offs.

Still, some remain concerned about the newly emerging underwriting horizon.

“The overall environment is deteriorating,” said David Nelms, chief executive at Discover, in an interview. It is “not quite as favorable as it was over the past few years.”

The post-2010 spike was brought down by lending largely to prime borrowers. However, in 2014, banks began loosening their standards in pursuit of higher yield, lower credit score customers. Card balances nationwide rose 6 percent over the last 12 months through May, a growth rate that is up from about 1 percent four years ago, according to the Federal Reserve.

Concerns about the losses are further cemented by the fact that U.S. unemployment is at record low levels — which has many worried that the situation could get markedly worse should the jobs situation change.

“That’s a little concerning,” said Michael Taiano, a director at Fitch.

Credit cards had also taken on a new importance in the Fed’s annual stress test of banks in June. According to the Fed, banks could face $100 billion in projected credit card losses in a severely adverse hypothetical recession, tied with commercial and industrial loans.

“We’ve seen an inflection point in credit,” said Charles Peabody, managing director at Compass Point Research & Trading LLC. “It is going to get worse from here.”