Credit card companies suffered their worst losses in nearly three years outside the financial crisis, Goldman Sachs reported. After reaching a low in September 2021, these losses began to increase due to an initial reversal of progress. But since the first quarter of 2022, they have been growing steadily at rates comparable to those seen during the 2008 recession. According to the company’s forecasts, this trend is expected to continue; This shows that the situation is far from resolved.
Price loss is now 3.63%, up 1.5 percent. Goldman Sachs expect, these losses to increase by another 1.3 points to 4.93%. This situation arises as Americans collectively owe more than $1 trillion on their credit cards, a historical high as reported by the Federal Reserve Bank of New York.
In a note issued on Friday, analyst Ryan Nash remarked, “We believe that delinquencies may continue to perform worse than the usual seasonal patterns through the middle of the next year, and we do not foresee losses peeking until late 2024 or early 2025 for most card issuers.” What makes this situation unusual is that these losses are intensifying despite the absence of an economic downturn, Nash pointed out.
Credit Card Loss Cycles and Future Projections
According to Nash, among the last five credit card loss cycles, three accompany with economic recessions. The remaining two took place during periods when the economy was not in a recession, specifically in the mid-1990s and from 2015 to 2019. Nash relied on historical patterns as a reference point to project future losses.
“In our analysis, the current cycle shares similarities with the characteristics observed in the late 1990s and exhibits some parallels with the 2015 to 2019 cycle. It entails a scenario where losses rise after a phase of robust loan growth and has displayed a similar pace of returning to normalcy in this current cycle,” Nash explained.
Furthermore, historical data indicates that losses typically reach their highest point approximately six to eight quarters after the peak in loan growth. This suggests that the credit normalization process is only halfway through, supporting the earlier projection of late 2024 or early 2025, as mentioned by Nash.
Nash identifies Capital One Financial as having the greatest potential downside risk, with Discover Financial Services following closely behind in terms of vulnerability.
Conclusion
Credit card companies are suffering their worst losses since the financial crisis, and losses are expected to continue from September 2021. Goldman Sachs expects losses to widen further to 4.93%. One objection is that these losses continue even if there is no recession.
Historical models show that the credit normalization process will only reach the midpoint, with estimates for the end of 2024 or the beginning of 2025. Capital One Financial Corp. facing the highest risk, according to Discovery Financial Services Inc. This highlights the challenges the credit card industry still faces.
