In the years since the Great Recession began, banks have enjoyed fewer losses from consumer credit defaults. However, recent comments from Citigroup and JPMorgan Chase & Co. highlight potential trouble ahead in the market for consumer credit, meaning more consumers are expected to default on their cards.
In a recent Bloomberg interview, an analyst at Compass Point Research described the current situation as “an inflection point in credit.” Banks are shoring up their reserve losses as credit quality is set to post significant declines. This is happening for the first time since the end of the fallout from the financial crisis.
Shares in the major consumer lending banks fell sharply on the news of worsening credit quality. It’s a double-whammy for the banks, as they lose on the default losses and the quality of their asset-backed securitization programs. In a market of rising rates, it is no wonder that bank shareholders are concerned about future profits in the consumer credit category.
What does this mean for consumers in general? They may see stricter regulations down the road for falling behind on credit card payments. Furthermore, consumers from a specific bank, such as Citi, might be able to expect more trouble than others.
Interestingly, Stephen Gandel at Bloomberg Gadfly denounced Citigroup’s consumer credit business as “a bust.” While the bank is profitable right now, the lender announced losses from its consumer lending division in the area of $1.2 billion. After nearly exiting the credit card business in 2009, Citigroup recently jumped back into the market aggressively, especially focused on branded cards from retailers.
Citigroup CEO John Gerspach made a fascinating comment regarding his company’s credit card business during a recent call with reporters. During a conversation about branded retail credit cards, Gerspach noted that credit issued through major retailers has a “higher propensity” to fall into trouble and require write-offs by the lender. Branded retailer credit cards often offer discounts and attractive terms for in-store purchases such as “don’t-pay-until” and bonus points, a feature often missing from standard counterparts.
For the average credit cardholder, it’s important to protect yourself if credit conditions tighten in the near future. It’s always a good idea to stay on top of your payments, but it’s also worth saving a little more in your emergency fund now while rates are low and lenders are flexible. If the market for consumer credit tightens, you will thank yourself for tuning up your finances and reviewing your credit card payment plan before interest rates go up and credit is harder to find.
Author: Dave Rathmanner
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