Consumer Re-Leveraging Raises Delinquency Concerns

Our latest quarterly survey of bank risk officers in North America always seems to offer a few interesting nuggets. Two results in this quarter’s survey that caught my attention were:

• Expectations for delinquencies on auto loans hitting their highest level since Q4 2012; 34% of respondents expected delinquencies on auto loans to grow in the next six months.
• Expectations for delinquencies on credit cards hitting their highest level in two years; 28% expected delinquencies on credit cards to increase.

Despite those expectations, our survey found the re-leveraging trend showing no signs of slowing. In the survey, 58% of bankers expected average balances on credit cards to increase over the next six months, with only 9% expecting balances to go down. In addition, 44% expected the amount of credit extended to consumers to increase, while just 14% expected this to decrease.

These survey results are consistent with recently released government data. The U.S. Commerce Department found consumer spending rose steadily throughout 2013, including a 0.5% increase in November. And data from the Federal Reserve found revolving credit for U.S. consumers reached a three-year high in October.

In light of these numbers, I don’t believe the delinquency predictions in our survey are alarming, although it is worth keeping a close eye on these trends. When I speak with our banking clients, most seem to be walking a fine line these days – trying to grow their lending portfolios without taking excessive risks.

But given that credit card delinquencies are near their lowest level since the Fed began tracking such delinquencies in the 1990s, a small uptick is to be expected and shouldn’t spook lenders. In fact, a slight increase in delinquencies is normal when availability of credit expands and borrowing increases.

View the full report on our survey findings. The survey included responses from nearly 300 risk managers at banks throughout the U.S. and Canada.