Banks are prepared for more consumers to default on their loans

US banks wiped out their recession-preparing strategies at the end of 2022.

Local lenders and banks with large credit card operations continued to make profits as interest rates rose in the fourth quarter, helping borrowers build more credit. However, many firms have tightened their lending standards and set aside more cash to cover potential credit losses, indicating they don’t think the good times will continue.

Capital One Financial Corp. set aside approximately $1 billion to cover potential credit losses in the fourth quarter, up 33% from the previous quarter. American Express Co. raised its reserves by more than 25%, securing nearly $500 million. Both had withdrawn those rainy day funds a year ago.

This July 22, 2019 file photo shows Capital One being mailed to North Andover, Massachusetts. (AP Photo/Elise Amendola, File/AP Newsroom)

“Of course, we are very careful about the economic environment going forward,” Richard Fairbank, CEO of Capital One, said on a conference call with analysts last week.

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Consumers are the bright spot of the economy. Even in the face of rising inflation, they continue to spend solidly, but spend less and save more during the holidays. And the unemployment rate remains at its lowest level in decades.

But there are signs that some households are under pressure. Borrowers have made more credit card purchases, but the pace of depleting their balances has slowed. Credit card and consumer loan delinquency rates in the fourth quarter will either approach pre-pandemic levels when stimulus and reduced spending on services allowed consumers to save more and pay off their debts, or reached that level.

A couple checks their credit card bills. (iStock/iStock)

In some consumer finance businesses, delinquency rates are above pre-pandemic levels.

At Ally Financial, the percentage of auto loans that were 60 days or more past due increased to 0.89% in the fourth quarter from 0.48% in the same period last year. More than 2% of his student loans are 30 days or more past due, a 0.5 percentage point increase from the year before, according to a report by Discover Financial Services. Both of these rates are higher than in 2019.

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“I think there is certainly a lot of concern about what will happen to the economy and the possibility of a recession in 2023,” Discover CEO Roger Hochschild said in an interview. , where we are currently sitting, consumers are still doing pretty well, supported by a very strong job market.”

Rising demand for products used in debt consolidation may indicate that borrowers are feeling more stressed, he added. Discover personal loan balances grew 14% year over year in the fourth quarter.

A customer uses an ATM at a Bank of America branch in Boston, Massachusetts, USA, October 11, 2017. REUTERS/Brian Snyder/File Photo (REUTERS/Brian Snyder/File Photo / Reuters Photos)

“We are definitely tightening credit standards,” Hochschild said. “We’re always looking for pockets of stress.”

This process is a delicate balance for lenders, and tightening too much can hurt your bottom line.

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“It could almost be seen as a risky move,” said Gerald Cassidy, an analyst at RBC Capital Markets. “While we don’t want to be too conservative and stop lending, we don’t want lending standards to collapse like they did in 2006.”