Credit card companies are experiencing the most significant increase in losses in nearly three decades, second only to the Great Financial Crisis, as reported by Goldman Sachs.
The decline in credit card losses hit its lowest point in September 2021. While the initial upturn in losses was likely due to the reversal of stimulus-related effects, they have been steadily surging since the first quarter of 2022. This surge represents a rate of increase not witnessed since the 2008 recession.
Goldman Sachs predicts that this trend is far from reaching its conclusion. Losses are currently at 3.63%, marking a 1.5 percentage point increase from their lowest point. Goldman anticipates a further 1.3 percentage point rise to 4.93%. These developments coincide with a record high of over $1 trillion in credit card debt held by Americans, as reported by the Federal Reserve Bank of New York.
“We think delinquencies could continue to underperform seasonality through the middle of next year and don’t see losses peaking until late 2024 / early 2025 for most issuers,” analyst Ryan Nash wrote.
What stands out as unusual is the acceleration of losses occurring outside the context of an economic downturn, as highlighted by Nash.
Out of the last five credit card loss cycles, three were notably associated with recessions. The other two instances, where such losses transpired in periods without economic recessions, were during the mid-’90s and the span from 2015 to 2019. Nash relied on historical data as a reference to project potential additional losses.
“In our view, this cycle resembles the characteristics of what was experienced in the late 1990s and somewhat similar to the ’15 to ’19 cycle where losses increase following a period of strong loan growth and has seen similar pace of normalization thus far this cycle,” Nash said.
History also shows that losses tend to peak six to eight quarters after loan growth peaks, he said. That implies the credit normalization cycle is only at its halfway point, hence the late 2024, early 2025 prediction, he said.
Nash sees the most downside risk for Capital One Financial,
followed by Discover Financial Services.