A consistent theme in banks’ second-quarter results has been that consumer loans have held up well during the coronavirus pandemic even as tens of millions of Americans have filed for unemployment benefits.
But banks CEOs are warning that delinquencies and defaults on credit card, auto and other consumer loans could spike in the second half of the year if Congress does not come through with another round of government stimulus. Many households that have experienced job losses have been able to keep current on monthly bills because they have received forbearance on home loans and an extra $600 a week from the federal government, on top of their state benefits. The unemployment aid is set to expire at the end of the month.
“So far our customers are making their payments,” Discover Financial Services Chairman and CEO Roger Hochschild said Thursday. “We do worry that if [government aid is] pulled back too quickly it’ll both impact not just those who were getting support” but also slow overall consumer spending.
“The withdrawal of that stimulus is going to impact everyone,” he added.
Margaret Keane, the CEO at Synchrony Financial, expressed similar
"As forbearance and stimulus wears off, we're definitely in a rockier place,” Keane said.
Congress is debating whether to extend the $600 weekly bonus that was included in the Coronavirus Aid, Relief and Economic Security Act passed in March. The benefit is set to expire July 31 under language in the law, but because many states make the payments weekly, the bonus would only apply to the last full week of the month. That means the bonus will dry up for most after this weekend.
The Biden administration once again extended the pause on student loan payments enacted to help borrowers during the COVID-19 pandemic, this time through the end of August.
The two states' combined plans amount to over $1.5 billion of the Homeowner Assistance Fund included within the American Rescue Plan Act , which was passed a year ago.
An uptick in pandemic-related payment suspensions reflecting new or restarted plan activity previously occurred as the omicron variant spread, but activity has since subsided.
The additional funds have been a lifeline for many consumers, who largely have been keeping up with credit card payments, bankers say. The percentage of Discover cardholders who’ve missed one monthly payment declined to 2.17% at the end of June from 2.62% in March. Similarly, the 30-day delinquency rate for Synchrony’s total loans fell more than a full percentage point quarter over quarter to 3.13%.
Discover granted a “skip-a-payment” plan to about $3.4 billion in credit card balances since the pandemic hit the U.S. and 70% are no longer enrolled in the program. About 80% have made a payment.
“The consumer is stronger coming into this recession than into the Great Recession,” Discover Chief Financial Officer John Greene said on a call with analysts Thursday.
Banks reported decent loan growth in the spring and early summer as businesses rushed to draw down credit lines and tap the Paycheck Protection Program. But demand has been muted since, and bankers can only guess when it will pick back up.
Bankers and fintech executives want lawmakers returning to Washington to focus on streamlined forgiveness and a second round of Paycheck Protection Program loans for small businesses.
Still, lenders are padding their reserves in the event that government aid dries up and consumers begin to sour.
Discover, of Riverwoods, Ill., set aside $2 billion in provisions for credit losses during the second quarter, up from $1.8 billion three months prior, according to its earnings report Thursday. The move resulted in a $368 million loss for the quarter, compared with a $753 million profit during the same period last year.
Synchrony, the lender behind many store-branded credit cards, reported on Tuesday a $1.7 billion provision during the quarter, about the same amount it set aside three months before but an increase of nearly 40% from one year ago. The Stamford, Conn., company’s net earnings declined 94% year over year to $48 million.
Discover executives said they feel good about the reserve build so far, indicating the second quarter may be the high-water mark for provisions. In addition to increasing the capital cushion, Discover tightened underwriting “pretty significantly” on personal loans the company offers, Hochschild said.
Hochschild said he is keeping especially close watch on unemployment figures.
Just as the unemployment bonus is about to expire, the number of unemployment claims made for the week ending July 18 jumped by 109,000 from the previous week to more than 1.4 million, the Labor Department said Thursday. The increase broke a streak of weekly declines going back to the end of March when businesses closed to prevent spread of the virus. In total, almost 53 million unemployment claims have been filed over the past 18 weeks.
“I’ve seen a lot of things, but nothing like this in terms of the speed and magnitude of the impact the pandemic has had on the economy,” Hochschild said on a call with analysts Thursday. “I don't think any of us in business have seen this.”
