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Credit card companies are experiencing a surge in losses, surpassing levels seen in the past three decades, with the exception of the Great Financial Crisis, according to a report by Goldman Sachs.
Following a brief decline in September 2021, credit card losses have been steadily increasing since the first quarter of 2022. This upward trend in losses is reminiscent of the recession in 2008.
Goldman Sachs predicts that this trend is far from over. Currently, losses stand at 3.63%, a 1.5 percentage point increase from the previous low, and the firm expects them to rise even further to 4.93%. This worrying scenario is unfolding as Americans accumulate over $1 trillion in credit card debt, a record high, as reported by the Federal Reserve Bank of New York.
“We anticipate that delinquencies will continue to deviate from seasonal patterns until the middle of next year, and we don’t expect losses to peak until late 2024 or early 2025 for most credit card issuers,” wrote analyst Ryan Nash in a note released on Friday.
Nash pointed out that what sets this situation apart is the acceleration of losses outside of an economic downturn.
Among the previous five credit card loss cycles, three occurred during recessions, Nash noted. The remaining two cycles took place in the mid-’90s and from 2015 to 2019 when the economy was not in a recession. Nash used historical data to inform his projections for further losses.
“In our analysis, this cycle bears similarities to the late 1990s and the 2015 to 2019 cycle, where losses increased following a period of robust loan growth and exhibited a similar pace of normalization,” Nash explained.
According to Nash, historical trends indicate that losses tend to peak six to eight quarters after loan growth reaches its highest point. This implies that the credit normalization cycle is only halfway through, aligning with the prediction of late 2024 or early 2025.
Nash identified Capital One Financial as the company with the highest downside risk, followed by Discover Financial Services.
— CNBC’s Michael Bloom contributed to this report.
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