NEW YORK–Asset quality at major banks was solid entering into the second quarter, but it’s expected to “deteriorate rapidly,” according new analysis from Moody’s Investment Services.
The company’s Pulse of the U.S. Consumer report noted that among the largest U.S. retail banks, consumer loan asset quality entered “the downturn on solid footing. However, the spike in unemployment will drive a rapid rise in consumer loan delinquencies and charge-offs over the coming quarters. If unemployment remains around or above 10% for several quarters, we expect credit card and auto loan performance to deteriorate substantially, with credit card charge-offs possibly approaching and auto loan charge-offs likely exceeding levels during the 2007-08 financial crisis.”
However, the report added, should unemployment fall to below 8% by early next year and continues to improve, “we expect credit card and auto-loan charge-offs will likely peak in 2021 at around 75% to 100% above 2019 levels of around 3.5% for the large credit card lenders and around 0.75% for the large auto lenders.”
Moody’s further forecast it expects residential mortgage asset quality will deteriorate the least, given the solid underwriting quality since the financial crisis.
What the Data Show
According to Moody’s data at the end of Q1 indicated:
- Credit card charge-offs increased modestly to 3.67% in Q1 2020, up four BPs from Q1 2019
- Card growth decelerated, with loans outstanding rising just 0.9% over the last year
- Auto loan charge-offs decreased again during the quarter 0.88%, down nine basis points from Q1 2019
- Annual loan balance growth increased to 4.8% over the last year
- Residential mortgage charge-offs decreased six BPS from a year ago. Residential mortgage portfolios were largely flat compared with the same quarter last year