Americans spend and don’t borrow. It is a problem for the banks.
The good news for banks is that consumers are overcrowded with cash and are less likely to fall behind on their debts. But it also means that it will still take a lot longer before they need to borrow more.
Banks really need loan growth to offset the effect of low interest rates and the drag of huge inflows of cash deposits into their balance sheets. Many banks’ credit card wallets plunged in 2020, with consumers spending less and paying off debts as well. In theory, the economic growth forecast for this year would imply greater use of credit by consumers and businesses to finance more activities.
The spending of bank customers is certainly increasing. Bank of America BAC 0.50%
said the first quarter was the highest on record for overall consumer spending. The bulk of this increase still comes from debit cards, which do not add to card loan balances, although the first quarter has started to see growth in credit card spending compared to the comparable period in 2019. . JPMorgan Chase JPM -0.09%
said even travel and entertainment spending was up 50% in March compared to February, and Citigroup C 0.60%
recovery recorded in areas such as travel and meals.
And yet, so far, banks still aren’t forecasting much more than a slight hike in consumer borrowing in the near future. In fact, the sheer size of banks ‘reserve releases is indicative of the strength of their clients’ balance sheets. This is good news for the costs of credit, but it also indicates how long it will take before spending picks up enough to send customers back to the well for more debt that will ultimately support bank profits over time. .
The customers of these banks are not necessarily representative of the population of Americans hardest hit by the pandemic, who today have an enormous need for liquidity and borrowing, but who often do not meet the lending standards of the most. big banks. But among its customers, Bank of America sees only about 30% of incoming stimulus funds spent, with the rest in accounts. US Bancorp USB 0.02%
said average card loans fell in the first quarter from the fourth in part due to “government stimulus payments used to pay down debt.”
A similar thing is happening in mortgage lending, where despite rising rates, a wave of prepayment via refinancing has always weighed on interest income. Bank of America said its quarterly net interest income could increase by $ 1 billion by the fourth quarter, compared to about $ 10 billion in each of the last two quarters. This forecast is based on modest loan growth and also a slowdown in mortgage payments, the bank said. JPMorgan said the bank expects some growth in consumer lending in the second half of the year.
One question that arises is whether consumers are definitely shifting certain spending habits towards debit cards. Still, there are dizzying indicators for credit cards. Bank of America said the pace of new quarterly card openings in the first quarter was about 60% of what it was before the pandemic and increasing. That’s from a nadir of closer to 40% of pre-pandemic levels. A return to somewhat simpler pre-pandemic underwriting criteria and the reopening of branches are useful. And banks are also seeing an increase in the number of people moving cash into investments, resulting in additional commission income.
For now, however, lenders are still waiting to see whether consumers will pick up where they left off with credit cards before the pandemic.
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Appeared in the April 16, 2021 print edition under the title “Americans Spend, Don’t Borrow, and it’s a Problem for the Banks.”