Consumer Bet Gets Riskier -- WSJ
July 23 2016 - 3:03AM
Dow Jones News
Banks are girding for higher loan losses as they cast a wider
net for borrowers
By AnnaMaria Andriotis
Big banks are socking away more money to cover possible losses
on consumer loans, as their executives warn the long boom in credit
quality has peaked.
Lenders including J.P. Morgan Chase & Co., Wells Fargo &
Co., Capital One Financial Corp. and Discover Financial Services
said on earnings calls this month that they have bolstered their
reserves -- in some cases for the first time in years -- to prepare
for an uptick in loan losses.
The higher reserves in part reflect efforts to expand loan
volume. As competition for borrowers intensifies, some lenders also
are lowering credit-score requirements and taking on riskier
customers.
But they also stem from a growing conviction that improvements
in credit quality have come to an end.
"We've had the best of times," John Shrewsberry, Wells Fargo's
chief financial officer, said on the bank's earnings call last
week. "It probably gets a little bit more average."
Wells Fargo added $150 million to its loan-loss reserves in the
second quarter, primarily because of loan growth, after adding $200
million in the first quarter. They were the first reserve builds
for the bank since the end of 2009.
Capital One said Thursday that it added $290 million in reserves
for its domestic credit-card business, a move that was driven both
by growth in customers' outstanding balances and by the expectation
that more would default. The bank also added to auto-loan reserves,
partly because of growth in loan volume that included a higher
portion of subprime borrowers. The bank said that this year it has
increased auto lending to borrowers with lower credit scores.
J.P. Morgan added $250 million of reserves for credit-card
losses in the second quarter, saying it expects loss rates to pick
up. The bank last added to card reserves in the fourth quarter of
2009, when default rates on general-purpose credit cards were
rising across the industry.
The moves don't mean credit quality is about to decline sharply.
Banks say consumers' financial health remains strong overall, and
they cite a low unemployment rate, rising home values and default
rates that remain near historic lows as reasons to be optimistic
about consumers.
But they do show the balancing act banks face as they negotiate
a period of extremely low interest rates that are eating into
profit margins. Borrowers with lower credit scores pay higher
interest rates and are more likely to carry credit-card balances,
which could bolster bank revenues. By slightly loosening standards
for loans, banks are betting that the increase in revenue will
outweigh any increases in loan losses.
"Lenders are more willing or have to take on more risk to grow,"
said John Hecht, an equity analyst at Jefferies Group LLC.
Defaults on general-purpose credit cards rose to 3.11% in June
from 2.88% a year earlier, according to data released Tuesday by
S&P/Experian Consumer Credit Default Indices. Defaults
increased each of the first five months of the year after mostly
falling since early 2010, according to the data.
Auto loans, a fast-growing category of credit, also have taken a
shakier turn. Some 0.91% of auto-loan dollars were in default as of
June, down from May but up from 0.85% a year earlier, according to
S&P/Experian.
More broadly, 13.3% of U.S. households are expected to miss a
minimum required payment on at least one of their debts during the
third quarter, the highest since the end of 2014, according to a
June survey by the Federal Reserve Bank of New York. The figure has
been rising since hitting a 2016 low of 11.5% in March.
Banks that are loosening their credit standards to make more
loans and get higher yields will be more exposed to such
trends.
J.P. Morgan has been lowering the credit scores it requires and
issuing cards to lend to more "near-prime" borrowers over the past
two to three years, Chief Financial Officer Marianne Lake said on
the bank's earnings call last week. Some 20% to 30% of J.P.
Morgan's new cards are given to borrowers with FICO credit scores
below 700, she said, referring to the scale that ranges from 300 to
850.
Many large banks are holding off on extending credit to
borrowers with lower scores. Bank of America Corp. and Citigroup
Inc. indicated in recent days that they weren't planning to loosen
lending restrictions. Wells Fargo has also said it hasn't loosened
criteria.
Discover said this week that it was willing to lend to borrowers
with slightly lower credit scores to help boost loan growth.
The company's credit-card net charge-off rate reached 2.39% in
the second quarter, up 0.11 percentage points from a year earlier.
Net charge-offs for its private student loans and personal loans
also increased.
"What you are getting is a very benign cycle, but delinquencies
almost have to rise a bit to get to normal levels," David Nelms,
Discover's chief executive, said in an interview after the lender
reported earnings on Tuesday.
--Emily Glazer and Robin Sidel contributed to this article.
(END) Dow Jones Newswires
July 23, 2016 02:48 ET (06:48 GMT)
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