By Nina Trentmann and Mark Maurer
As borrowers get a break on paying down credit-card, vehicle and
other consumer loans, banks and financial institutions extending
the relief face a balancing act in the months ahead.
Efforts to maintain customer relationships now could stave off a
wave of potential defaults, finance professionals say. But
companies with weakening consumer debt on their books need to
figure out how much payment relief they can afford to provide,
allowing that some consumers won't be able to pay later,
potentially driving up losses for lenders.
Financial institutions from American Express Co. to JPMorgan
Chase & Co. are offering delayed payments, fee waivers and
other credit relief to consumers as more than 36 million Americans
filed for unemployment claims in the weeks after many states locked
down nonessential businesses to curb the spread of the coronavirus
pandemic.
In doing so, finance chiefs are leaning on a playbook that
recalls how they handled the record number of defaults and
nonperforming loans arising from the 2008 financial crisis.
"So what is the carrot at the end? These are good customers who
are in a bad time through no fault of their own, and we'd like to
retain them as customers," AmEx Chief Executive Stephen Squeri said
during an earnings call in April.
JPMorgan is providing payment relief for hundreds of thousands
of consumer accounts, including offering 90-day grace periods for
mortgage, auto and car payments, as well as waiving or refunding
certain fees. The company also paused foreclosures and auto
repossessions, Jennifer Piepszak, chief financial officer of
JPMorgan, said on an April earnings call.
At the same time, financial institutions are tightening lending
requirements for new loans -- including approving fewer consumers
with low credit scores, asking for more income documentation and
lowering spending limits on new credit cards.
Consumer debt was on the rise even before the pandemic hit.
Household debt rose to $14.3 trillion in the quarter ended March
31, $1.6 trillion higher than the 2008 record, according to the
Federal Reserve Bank of New York. While auto loans increased to
$1.35 trillion, credit-card debt came down during the quarter to
$890 billion, according to the bank. That compares with $790
billion in auto loans and $870 billion in credit card debt at the
end of 2008.
The New York Fed warned that its most recent numbers don't fully
reflect the effects of the coronavirus pandemic yet.
Delinquencies and defaults on consumer debt trail the
unemployment rate, and any prolonged period of joblessness likely
will mean that more borrowers will fall behind on payments. The
unemployment rate rose to a record 14.7% in April, overtaking the
previous record rate of 10.8% for data tracing back to 1948.
Payrolls dropped by 20.5 million workers in April and are expected
to fall further.
Companies that want to be flexible with borrowers should make
careful considerations.
"It depends on the cash position and the access to cash that
each individual business has," said Philip Noftsinger, vice
president of finance and corporate controller at CBIZ Inc., a
professional-services company.
Ford Motor Credit Co. LLC, the financing arm of the U.S. car
manufacturer, meanwhile, is offering changes to payment schedules
as well as a deferral of monthly payments.
Ford Credit, for instance, had $28 billion in liquidity at the
end of the first quarter and access to various funding sources to
provide financing in the future, said Tim Stone, Ford Motor Co.'s
chief financial officer, on an earnings call in April. Ford's
credit arm -- which generated a significant portion of the auto
maker's 2019 profit -- put aside about $1.2 billion in the first
quarter -- up $718 million from the fourth quarter in 2019 -- to
cover future credit losses.
That compares with $23.9 billion in liquidity the company had at
the end of the first quarter of 2008. At that time, Ford Credit put
aside $327 million to cover potential future credit losses, but
changes to accounting standards make it hard to draw comparisons.
Ford Credit said it had a net loss totaling $1.5 billion at the end
of 2008 as a result of the crisis, compared with a net profit of
$775 million in 2007.
Forbearance programs, such as those offered by car companies,
allow lenders to avoid an increase in delinquencies in the short
term, according to Fitch Ratings. "But it will likely delay the
inevitable charge-offs," Fitch analysts said in note last
month.
Delinquency rates on credit-card loans reached 6.77% in the
second quarter of 2009, according to the Federal Reserve's Board of
Governors. At that level of distress, consumers lean heavily on
lenders.
American Express already is seeing signs of consumers in
trouble. The company said of the 845,000 account holders that
joined its customer pandemic relief program through mid-April, many
already have made some payments since they enrolled, AmEx finance
chief Jeffrey C. Campbell said in the April earnings call. This
time around, the company's relief efforts provide a range of
options to consumers, whereas in 2008, AmEx mainly provided
short-term help to card customers.
Synchrony Financial, a credit-card issuer and provider of
consumer financing tools, is waiving late fees and interest
charges. It is deferring minimum payments for up to three months
and extending certain promotions. About 800,000 account holders
took advantage of these options during the first quarter, finance
chief Brian Wenzel said on an April 21 earnings call.
How much risk companies take, and how much help consumers might
need, will depend on the length and the severity of the economic
downturn caused by the pandemic.
"You should see consumers come out of this less scarred on the
debt and delinquency front, because the shock is going to be a lot
briefer relative to what we had in 2008 or 2009," said Torsten
Slok, chief economist at Deutsche Bank Securities.
The financial crisis had a lengthy recovery because the U.S. had
to fix imbalances in certain markets, in contrast with the
pandemic, which wasn't triggered by an economic imbalance, he
said.
"Once we are on the other side, many of the borrowers that are
suffering right now will be in a better financial position to meet
their financial obligations. But we will have to have permanent
forgiveness for some customers," said Tendayi Kapfidze, chief
economist at LendingTree Inc., an online-lending marketplace.
Write to Nina Trentmann at Nina.Trentmann@wsj.com and Mark
Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
May 17, 2020 09:14 ET (13:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
JP Morgan Chase (NYSE:JPM)
Historical Stock Chart
From Aug 2024 to Sep 2024
JP Morgan Chase (NYSE:JPM)
Historical Stock Chart
From Sep 2023 to Sep 2024