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The Institutional Risk Analyst

© 2003-2024 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

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Consumer Credit Collapsing? Not Yet...

… It's the end of the world as we know it

It's the end of the world as we know it

It's the end of the world as we know it and I feel fine

September 5, 2023 | A couple of weeks ago, when China Evergrande filed for bankruptcy in the US, many observers started to ponder what seemed like China’s Lehman Brothers moment, when the decision was made to allow a large issuer of debt to default. Now China Garden, the country’s largest developer, has narrowly missed a default on dollar obligations, but the company’s debt is trading for pennies on the dollar. Stay tuned as China’s dollar ponzi scheme implodes.

Meanwhile in Washington, the grand parade of mediocrity continues apace. This week the FDIC hopefully will release the US bank data and peer metrics for Q2 2023, a week late. The data has actually been compiled and completed for weeks, but the FDIC, Federal Reserve Board and other prudential regulators drag their feet. Why? Because the largest banks want to make sure that investors don’t pay attention to the detailed financial data and metrics. Barring further delays, we’ll be releasing The IRA Bank Book for Q3 2023 next week.

Meanwhile in the credit channel, a number of analysts and media are getting positively fussed and bothered about rising levels of delinquency on credit card and auto loans, two of the largest categories of consumer credit after 1-4 family mortgages. This is part of a false narrative that is literally oozing up from the ground that says the US economy and especially consumers are headed for the worst credit default event since 2008. Really?

Looking at the data, however, the headline in the New York Post seems to be completely wrong. But this is not the first time.

As we noted in previous posts, we are worried about the volatility of bank credit, but consumer credit is way, way back at the end of the line in terms of urgency. Commercial real estate and related exposures are clearly bigger problems, followed by commercial bank loans on government-insured residential mortgages and Ginnie Mae MBS. But the conflicted political and media narrative seems instead focused on how rising interest rates impact consumers. Oh me, oh my.

If we look at the data from S&P Experian, the latest release simply does not support the idea that consumer defaults on auto loans and credit cards are about to explode. Quite the contrary. The S&P/Experian Auto Loan Default index is shown below.

As the chart suggests, defaults on auto loans are still tracking significantly below historical levels going back a decade. Note the sharp decline in auto loan delinquency during the period of QE. Will auto loans now rise above the 10-year average? Possibly. But we are not in an existential consumer credit crisis quite yet. Frankly, the New York Post should retract this story.

Auto loan delinquencies reported by banks are up, but hardly in a way to cause the markets to go “risk off” on financial stocks. The herd mentality of Wall Street is so strong that we apparently have decided to equate “high for longer” on short-term interest rates with the 2008 subprime mortgage collapse?

Looking at JPMorgan (JPM), net losses on auto loans were just 41bp in Q2 2023 vs 15bp a year ago during QE. The average net loss on auto loans for the 140 banks in Peer Group 1 was just 41bp. Is there a crisis here somewhere? Total bank-owned auto loans are about $500 billion or one-third of the $1.5 trillion in total auto loans.

The $1 trillion of subprime auto loans are mostly sold into heavily over-collateralized asset-backed securities (ABS) held by bond investors. These ABS have performed extremely well in 2008 and through the COVID lockdown, with the ratings of specific deals often upgraded as the ABS matures. So while defaults on subprime auto loans are significantly higher than bank owned loans, investors rarely take a loss.

"While there were some rare instances of speculative-grade (rated BB+ and below) subprime auto ABS which took losses through the Global Financial Crisis, bonds rated investment grade (BBB- or better) were able to weather the downturn," Laura Mayfield of Ft Washington Investment Advisors wrote last August. "This remarkable performance through the most severe economic recession since The Depression is widely regarded as having validated the modern-day subprime auto ABS model."

Consumers are defaulting on car loans in growing numbers, but like 1-4 family mortgages, the biggest (indeed, only) spike is among subprime borrowers. Borrowers who have credit scores of 600 and below are defaulting on subprime car loans and, yes, FHA and VA mortgages, but the rest of the credit stack is barely moving.

Moving to the broader view of consumer credit, the New York Post report again seems to be in error and very deliberately. While the report references the S&P Experian data, in fact the chart below shows that defaults on consumer credit exposures are still tracking below pre-COVID levels and are nowhere near 2008 levels or even a 10-year high.

Now there may be some people in the media and among the hedge fund mafia that want you to believe that consumer credit is about to collapse, but the data from the credit agencies and banks do not yet support this pessimistic view. Some consumers may be “struggling,” to borrow one tired media cliche, but default rates on credit cards are nowhere near 10-year highs.

One of our favorite “oh no” media headlines involves the fact that credit card receivables are climbing above $1 trillion. This is actually a positive for US banks, which charge well into double digit rates on credit card assets. JPMorgan’s net default rate for credit cards was just 2.3% in Q2 2023 vs 3.3% for Peer Group 1, but as the chart below suggests, we are miles away from a 10-year peak much less anywhere near 2008 levels of default.

Source: FDIC

Fans of the false impending collapse of consumer credit narrative should not be impressed by the fact that credit card outstandings are above $1 trillion. Rather, the more astute members of the media and hedge fund community should focus instead on the fact that credit card utilization is just barely 25% of the $4.4 trillion in unused total card capacity. This is what we call “exposure at default” under Basel I. Duh.

Source: FDIC

So if tomorrow morning, every American with a credit card maxed out their credit lines and then immediately filed bankruptcy, that would be a financial crisis. But sadly for the bears in the audience, that is not likely to happen. Indeed, nothing would make the banks happier than if consumers would use more credit. Don't hold your breath waiting to read that in the mainstream media.

The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.


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