US payrolls grew by 223,000 in May, 33K higher than economists’ estimates of 190,000. The unemployment rate dropped to 3.8%, the lowest since Lyndon B. Johnson was president in 1969. Average hourly earnings rose by 2.7% YoY putting upward pressure on inflation expectations.
The Fed remains track to raise rates by 25 bp in the June meeting and the market is pricing in a 94% probability of a rate hike. The yield curve continues to flatten, and the 2-10 treasury spread dropped to 42 bps. Rising short-term rates and a flattening yield curve raise financing costs for lenders and reduce the lending margins for banks.
This week, PeerIQ CEO Ram Ahluwalia discussed the growth of personal lending and delinquency trends in the sector with Pimm Fox and Lisa Abramowicz on Bloomberg Radio. Ram detailed that the personal loan asset class, based on data from our partnership with TransUnion, continues to grow at 25% YoY clip while overall credit has been growing at 8% YoY.
Most loans are being extended to prime consumers and lenders have been tightening underwriting guidelines in response to loan performance. Ram pointed out that losses have been higher on newer vintages as shown below, and that this is in part driven by a greater supply of credit, credit re-normalization and other factors. Investors continue to generate net positive returns and smart investors are thoughtfully managing portfolio positioning across credit grades, asset classes, and channels. Bloomberg also reported that lenders have tightened underwriting in response to higher than expected losses. Fitch is of the view that tightening lending standards may not be leading to the desired results in loss performance and that most securitizations don’t warrant high-investment grade ratings.
The chart below illustrates the vintage pattern:
US Economic Outlook from TransUnion Financial Services Summit 2018
TransUnion held its landmark annual Financial Services Summit last week in Chicago. John Silvia, chief economist at Wells Fargo, presented his outlook for the US economy. Below are some highlights:
- Short-run GDP growth rate will be around 3%, driven by consumer spending and stimulus from the tax reform act. However, over the long-term, GDP growth will be hampered as the economy’s resources are approaching full employment, low trend productivity growth, and fading (and reversing stimulus) effects of tax reform. One bright spot is that capital spending is at multi-year highs which could lead to higher productivity gains in the future.
2. Long-range inflation expectation is ~2% which would put a natural ceiling on the neutral Federal Funds Rate and the number of Fed hikes. Inflation has been stronger in services than in commodities.
3. As the Fed raises rates and tapers the reinvestment of its balance sheet, the 1-5 year part of the treasury curve will be most affected, as that’s where the majority of the Fed’s holdings lie. This should lead to a flatter yield curve and put pressure on refinancing of corporate debt, most of which is benchmarked to the less than 5-year part of the yield curve. Rising rates will also cause the debt-laden US consumer to slow down spending as a larger portion of income goes towards debt service.
4. Tight lending standards and economic strength have brought down the delinquency rates in all asset classes except auto loans. Delinquencies in auto loans have picked up recently to 4.3%, with subprime auto doing worse.
5. US GDP growth has been aided by strong tailwinds in the form of stimulus from tax reform, low interest rates, and strong credit growth. As interest rates rise and consumer credit growth slows, investors need to keep an eye on economic fundamentals before making investment decisions. PeerIQ can help monitor the state of the consumer. Using PeerIQ’s Consumer Insights report which is geared towards investors in consumer loans and ABS, and to allow readers to look at and analyze origination, delinquency and other performance trends to make better risk and investments decisions.
Reach out to learn more about the report or other highlights from the TransUnion summit or request a demo of the PeerIQ platform highlighting real-time credit performance trends for investors.
PeerIQ in the News:
- Rapid Consumer Loan Growth Has Led to Deteriorating Credit (Bloomberg Radio, 5/31/18) PeerIQ CEO Ram Ahluwalia discussed the growth of personal lending and delinquency trends in the sector with Pimm Fox and Lisa Abramowicz on Bloomberg Radio. Ram detailed that personal loans have been growing at 25% YoY and overall credit has been growing at 8% YoY. Most loans are being extended to prime consumers and lenders have been tightening underwriting guidelines in response to loan performance. Ram pointed out that losses have been higher on newer vintages.
- Online Lenders Tighten Rules After a Wave of Defaults (Bloomberg, 5/30/18) Bloomberg reported that lenders have been eliminating riskier borrower populations in response to rising losses.
- Online Lenders Tighten Rules After a Wave of Defaults (American Banker, 5/30/18) American Banker also reported that lenders have been eliminating riskier borrower populations and talked about average credit scores rising on lender’s portfolios.
- S. Payrolls Rise 223,000; Jobless Rate Matches 48-Year Low (Bloomberg, 6/1/18) 223,000 jobs created in May pushed the unemployment rate down to 3.8%, keeping the Fed on track to raise rates in the June meeting.
- S. Consumer-Spending Pickup Adds More Juice to Second Quarter (Bloomberg, 5/31/18) US consumer spending grew by 0.6% MoM boosting US GDP growth.
- Fitch: Marketplace Lenders’ Credit Catchup Uncertain for US ABS (Fitch Ratings, 5/30/18) Tighter underwriting standards may not do enough to improve loss performance, and investors should monitor credit performance closely.
- What’s behind rising delinquencies on private-label credit cards (American Banker, 5/23/18) As retailers shut down, their store cards see higher delinquencies as borrowers wrongly assume that they don’t need to pay these cards back.
- How credit card issuers are prepping for the next downturn (American Banker, 5/31/18) Credit card issuers have higher average credit scores on their portfolios now than they did pre-crisis and are stepping up recovery efforts to prepare for the next downturn. Average credit scores are a misleading metric to gauge borrower credit quality.
- Morgan Stanley Taps BlackRock to Help Lure $2 Trillion of Assets (Bloomberg, 5/30/18) MS will use BlackRock’s Aladdin software to provide better portfolio insights to its clients and attract more assets.
- Principal Financial acquires digital advice startup RobustWealth (Investment News, 5/30/18) In continuing financial institution – fintech partnerships, Principal Financial will user RobustWealth’s technology platform to provide a roboadvisor.
- PayPal is Deepening its Partnership with Google Pay (PayPal, 5/24/18) Adding your PayPal account to Google Pay will allow users to pay online and in-store. Google Pay has not got the traction it expected and is now looking at PayPal to be a dominant player in the payments space.
- Wells Fargo Plans to Expand Auto Lending Again (LendEdu, 5/30/18) Wells Fargo is cautiously getting back to increasing auto lending, after reducing its portfolio and tightening underwriting in 2017.
- Former Amex chief backs immigrant credit score provider (FT, 5/30/18) Ken Chenault’s fund has invested in Nova, a company that provides credit to immigrants, who are a traditionally underbanked segment.
- Vermont Passes First-of-Its-Kind Law to Regulate Data Brokers (Gizmodo, 5/27/18) Vermont will require data companies to register with the state and spell out how they use client data, in a first attempt to provide oversight to the data management industry.
- Startups Colonize New York Subway, Pricing Out Plastic Surgery Ads (Bloomberg, 5/29/18) High-tech startups are using decidedly low-tech advertising in their battle for customers.