The de-leveraging by U.S. consumers since the emergence of the pandemic has resulted in sharp declines in U.S. credit card debt, which bodes well for near-term credit performance.
However, lower credit card volumes and loan balances will partially offset the better-than-expected credit performance and continue to pressure earnings over the near to medium term, Fitch Ratings says.
In response to pandemic-related economic uncertainties, credit card issuers dramatically scaled back investments in new account acquisition and tightened underwriting standards to levels not seen since the global financial crisis (GFC).
Fitch viewed these actions as prudent given heightened uncertainty. However, when coupled with higher paydowns of credit card debt fueled by government stimulus, a sharp contraction in industrywide credit card receivables resulted.
During the GFC, there was a divergence between credit and debit card usage., with the former declining and the latter increasing. This phenomenon has been much more pronounced during the pandemic, with a 32-percentage point (year-over-year) difference between Visa and MasterCard debit and credit card volume growth for the quarters ended June 30, 2020 and 31 percentage point difference in September 30, 2020, versus the high-teens divergence in growth amid the GFC.
Forbearance programs and unprecedented government stimulus have extended the timeline for chargeoff recognition, and Fitch expects higher credit losses will begin to manifest in 2H21.
A moderate increase in credit card loss rates to levels below prior cyclical peaks could result in a revision of Fitch’s Worsening sector outlook and Negative Ratings Outlook for U.S. monoline credit card issuers.
However, ratings could be pressured longer term if revenue and earnings cannot recover to pre-pandemic levels due to sustained reductions in loan balances, as earnings and profitability generally have a greater influence on Fitch’s ratings of monoline credit card issuers.