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Banks' Credit Card Defaults Down in July on Forbearances

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The rate of U.S. credit card defaults persistently showed signs of improvement in July 2020 despite coronavirus-related economic slowdown. Improving trends in credit card portfolios of banks have come at a time when the index of U.S. consumer confidence declined to 92.6 in July from 98.3 in the prior month.

Credit card loans are charged off after consumers are delinquent on numerous payments and a company determines that those loans won't be repaid.


Bank of America’s (BAC - Free Report) charge-off rate declined to 2.12% in July from June’s 2.15%, while delinquencies improved to 1.16% from 1.30% in the prior month. Likewise, Citigroup’s (C - Free Report) credit card charge-off rate reduced in July to 2.42% from 2.63% in June. Its delinquency rate fell 4 basis points (bps) from the prior month to 1.43%.

Additionally, JPMorgan’s (JPM - Free Report) rate of losses on credit card loans declined 3 bps in July to 2.03%. Its delinquency rate improved to 0.99% from the prior month to 1.07%.

Another major credit card issuer, Capital One (COF - Free Report) also recorded a fall in both charge off and delinquency rates for the reported month. The company’s charge-off rate declined to 3.82% from 4.15% in July and delinquency rate fell 30 bps to 2.44%.

Further, Synchrony Financial’s (SYF - Free Report) adjusted charge-off rate decreased to 4.80% in July from June’s 5.10%, while core delinquencies improved to 2.90% from 3.10% in the prior month.

American Express’ (AXP - Free Report) rate of charge-offs was 2.60% in July, in line with the prior-month level. Its rate of delinquencies improved to 1.40% from 1.50% in June. Further, Discover Financial’s (DFS - Free Report) charge-off rate decreased 23 bps sequentially to 3.42% in July, while delinquency rate dropped to 2.03% for the reported month from 2.17% in June.

Our Take

Just by looking at these figures, it is easy to say that all seems to be well for banks in terms of credit card loan portfolios. But one must remember that these numbers were mainly due to the payment deferral program. Once it ends, there is a high chance of a rise in delinquency rates.

Also, the country’s economy is still not out of the woods, with unemployment rates remaining at high levels and the chances of faster economic recovery being dim. With spike in coronavirus cases across a number of states, reopening of businesses have been stalled again.

Hence, the actual impact of economic slowdown is likely to be seen in the latter part of 2020, as customers reassess their financial position and many credit-card issuers stop offering forbearance.

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