On behalf of our entire team at PeerIQ, I would like to express our heartfelt gratitude this Thanksgiving holiday. We are grateful for the trust and confidence you and the market place in us each day. We truly value the pleasure of knowing and working with you to create transparency, standards, and liquidity for the consumer credit sector.
PeerIQ last week released our latest Lending Earnings Insights report where we analyze the earnings of bulge-bracket banks, credit card issuers and FinTech lenders looking for any signs of credit deterioration.
One of the main themes that we explored in the LEI was how late we are in the credit cycle. Most C-level executives were extremely are sanguine on the economy but are nonetheless taking precautions. PeerIQ’s view is “The good news — and the bad news — is that conditions don’t get better than they are now.” We recommend reviewing Bloomberg Julie Verhage’s “US Banks See Good Times Ahead Even as Many Prep for Downturn” for more.
Across consumer lending products generally, credit performance has exhibited low delinquencies and defaults. Large banks (particularly money center banks) have reduced loan loss provisions. Notable exceptions include GS and Amex which are growing installment lending portfolios and building reserves.
Source: PeerIQ, Bloomberg
Below is a compilation of quotes from C-level leaders across financial institutions:
(CEO, Richard Fairbanks)
|“one can’t help but be struck by just how good the economy at this point is and, in some ways, it almost feels too good to be true […] planets have aligned to make this environment so positive right now. But we can’t forget the longer-term issues out there, the implications of rising interest rates, growing government deficits, trade related issue and also cumulatively some of the effects that’s been going on with consumer indebtedness even though sort of the supply issues out there have gotten a little bit better in recent couple of quarters.”|
(CFO, Steven Scherr)
|“[…] mindful of being potentially late in the consumer cycle. And so, we have honed our underwriting standards and have watched where our vintages come in. […] particularly as our vintages start to illustrate where we are, but equally mindful of where we are in the consumer cycle. I’d say by the way on that, there’s no material evidence to suggest that it’s turning. But equally, we take stock of just how long the cycle has gone. And so, we’re quite careful, and 2019 will be about pace of growth, not whether we will grow.”|
(CFO, Marianne Lake)
|“I would say that as we look at the economy, we don’t see it slowing down. It
seems to be continuing to grow pretty solidly. There is divergence around the world. So, it’s led by U.S. strength, but still expecting there to be more convergence going forward. So, I actually think that our outlook is still quite optimistic on the global economy. […] And also, just to talk about monetary policy for a second, everything – given that growth outlook is really sort of lining up for a December rate hike and for more hikes into 2019 and the continuation hopefully of a steeper yield curve and that all should be constructive for bank stocks.”
(CFO, Scott Parker)
|“But, overall, I’d say that the macro is still a healthy customer, a healthy economy, low unemployment, strong consumer confidence are things that continue to – things that we watch closely. And any change in those would have an impact on the consumer. But I think given our disciplined underwriting, we’re kind of already factoring some of that in.”|
(CEO, Wells Fargo)
|“[…] because of the economic growth here in the U.S. but around the world, the credit quality for our customers in the commercial, corporate world has never been better. Their balance sheets are strong. They have extended their maturities. Their interest coverage is higher than it’s ever been, because their debt service is lower. “|
Source: PeerIQ, Company Reports
How Late-Cycle Expansions Turn into Recessions
The current US expansion that started in June 2009 is the longest on record at over 113 months. Late expansions are characterized by low unemployment, high consumer confidence, high asset values. We currently observe a near 50-year low unemployment rate, near record high consumer confidence, and the highest level of consumer credit outstanding (although well below peak per-capita debt levels).
Ironically, it is these solid economic indicators that are responsible for the party coming to an end. In a simplified model, credit availability expands to the marginal borrower (e.g., new entrants, cov-lite corporate loans, thin-file credits, etc.) just until the marginal consumer or corporate loans creates more losses than expected. Lenders feel the pinch on credit performance and on funding due to rising rates. Lenders individually tighten lending leading to a reduction in the supply of credit on an aggregate basis.
We have not reached that turning point yet, but we remain eagle-eyed to the data, so investors and portfolio managers can position appropriately. Reach out to PeerIQ to learn more about how to track real-time credit performance trends across mortgage, auto, student, credit cards, and personal loans.
PeerIQ’s Lending Earnings Insights Webinar
PeerIQ will be hosting a webinar on Lending Earnings Insights and other topics on Thursday, the 29th of November at 3 pm EST. Join us to learn how late we are in the credit cycle, and the trends in delinquencies and defaults. Click here to register and to add the invitation to your calendar.
We wish everyone a safe and happy Thanksgiving holiday!
- Banks See Good Times Ahead Even as Many Prep for Downturn (Bloomberg, 11/20/18)
- PeerIQ’s Q4 2018 Lending Earnings Insights Report (LendAcademy, 11/20/18)
- U.S. banks see good times ahead even as many prep for downturn (Finance and Commerce, 11/20/18)
- The Next Credit Crisis Will Hit Consumers Hardest (Bloomberg, 11/21/18) All-time high consumer credit outstanding could precipitate the next downturn.
- Americans are splurging on all flavors of subprime debt (Quartz.com, 11/16/18) Unsecured personal loans to subprime borrowers grew by 28% YoY in September.
- ‘I Can Be the Bank’: Individual Investors Buy Busted Mortgages (WSJ, 11/20/18) Individual investors are buying NPLs and trying to flip them at a profit once the loans start performing after modifications.
- LendingClub Reaches $1bn in CLUB Certificate Issuance (LendAcademy, 11/121/18) As lenders look to diversify their sources of funding, LC’s CLUB certificate program has reached $1 Bn in issuance.
- Snoop Dogg’s Surprisingly Solid Tips for Thanksgiving Dinner (Bloomberg, 11/7/18) From Thanksgiving snacks to a full turkey, Snoop Dogg lays out his recipes in his new cookbook.