By Ray Birch
NEW YORK—What will the second round of stimulus do for the state of member delinquencies?
One expert believes it may push out even further an impending problem–but it’s also possible credit unions will not experience any serious portfolio quality problems altogether.
Michael Taiano, senior director of financial institutions at Fitch Ratings, told CUToday.info many are sharing fears the government stimulus and assistance provided to consumers and businesses in 2020 and now early 2021 are simply kicking further down the road a big spike in delinquencies.
As CUToday.info has reported, delinquencies at financial institutions have remained below expectations, and loan loss accounts at credit unions appear to have been well overfunded as a result.
“There is the potential that loan losses could climb higher, and this latest round of stimulus could just push out credit losses further, which some people have been expecting to arrive,” said Taiano. “Or, the government may be effective in getting what is effectively a bridge in place to the other side of the pandemic—when we get to that herd immunity and the country opens back up—and the big losses may never appear.”
Reports indicate vaccination rates across the U.S. are increasing, and the number of COVID-19 hospitalizations are declining. Since vaccine distribution began in the U.S. on Dec. 14, more than 90-million doses have been administered, reaching 17.7% of the total U.S. population, according to federal data collected by the Centers for Disease Control and Prevention. The U.S. is currently administering more than 2.2 million shots a day.
Pushing Issues Out
“I think people would argue that some of the effects toward the middle or end of last year pushed things out as opposed to eliminating the credit issues,” continued Taiano. “But, again, it remains to be seen.”
Reviewing what has occurred with credit over the past year, Taiano noted data show consumers have put away their credit cards in favor of debit.
“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,” Taiano observed.
He noted that 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 12 years ago.
“Fitch viewed these actions as prudent given heightened uncertainty,” Taiano said. “However, when coupled with higher paydowns of credit card debt fueled by government stimulus, a sharp contraction in industrywide credit card receivables resulted.”
Taiano pointed out that during the Great Recession 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 through June 30 of last year, and a 31 percentage point difference in September 30, 2020, versus the high-teens divergence in growth during the Great Recession,” he said.
Unprecedented Government Stimulus
Michael Taiano
Forbearance programs and unprecedented government stimulus have extended the timeline for charge-off recognition, and Taiano said Fitch expects higher credit losses could begin to manifest in the second half of 2021.
What has also bolstered credit performance is consumer deposits growing to record levels, noted Taiano.
“We’ve seen this massive government stimulus, and consumers have cut back on spending due to not only the fear of the unknown from the pandemic but also from not being able to do things, such as travel,” Taiano said. “That has certainly helped us avoid the massive delinquencies we thought were coming at the start of the health crisis.”
Lenders should also brace for consumer reluctance to rush back to using credit cards when the health crisis comes to an end, according to Taiano.
“The savings rates have gone up to levels that we've never seen,” he explained. “So, will consumers really need as much credit on the other side of the pandemic?”
As CUToday.info has regularly reported, during the health crisis consumers have turned to their debit cards much more than credit.
“The gap between credit and debit card usage has really widened. We'll see whether this becomes a longer-term trend,” said Taiano.
There are also new competitors for credit cards that have emerged in the past year.
“These buy-now-pay-later players that are out there, with installment products that consumer seem to like, particularly the younger generations,” said Tiaino. “I think that's something to wait and see how that plays out in the post-pandemic world.”