Lenders and investors are signaling confidence in borrowers' ability to manage their credit card debts despite delinquencies that have jumped past pre-pandemic levels.

The ratio of overdue balances to total credit card loans jumped to 3.33% in 2023 across US banks, more than reversing a drop to 1.71% in 2021 as consumers slashed borrowing during the pandemic and government assistance bolstered their finances. Net charge-offs (NCOs), or amounts that lenders write off as uncollectable and usually trail initial delinquencies by about six months, jumped to 3.58% in 2023, up from a 2022 low of 2.10% and just a little below levels that prevailed from 2017 to 2019, according to data from S&P Global Market Intelligence.

Monthly reports have shown subsiding year-over-year deterioration in delinquencies, however, which along with continued strength in employment — the primary driver of consumer credit performance — may be putting peak losses into view.

Capital One Financial Corp. says that its card delinquencies stabilized starting in the middle of 2023, with ordinary seasonal fluctuations taking over from the process of upward "normalization" from pandemic lows. The company's shares surged 52.4% from Oct. 25 through March 15, strengthening the currency it used to announce one of the biggest bank acquisitions of all time, for credit card rival Discover Financial Services.

Capital One expects that its NCOs will also soon stabilize about 15% higher than pre-pandemic levels, said Senior Vice President of Global Finance Jeff Norris on March 5, with the overshoot reflecting giveback from "a prolonged period of lower-than-average" losses, and a dearth of recent charge-offs from which lenders generally generate some recoveries.

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Vote of confidence

Performance has varied across lenders, with NCOs increasing past expectations at Discover, whose shares had lagged Capital One's before the deal announcement Feb. 19.

Year-over-year increases in early-stage delinquencies also diminished at Discover in December, however, and the lender has put the brakes on new account growth.

In a Feb. 23 note, Piper Sandler analyst Kevin Barker said the acquisition represents "a vote of confidence in [Discover's] credit trajectory," delivering "implicit confirmation credit losses at [Discover] wouldn't get out of control ... given one of most respected assessors of credit risk [Capital One] just gave their stamp of approval."

Capital One has focused on "super prime" customers with very high credit scores and customers just outside the prime category, while Discover has focused on prime customers, a configuration that analysts regard as complementary.

"We came away satisfied on the credit front that, while they've had a temporary sort of gapping out of credit performance, that was largely driven by recent vintages where they kind of expanded their view of credit a little bit and had some outsized growth," Norris said. "We've also learned that they pulled back in ways that we thought were really good in terms of addressing those performances."

While the increase in delinquencies across the industry is itself a negative reading on the health of the consumer, other signals — in addition to a robust labor market — are showing continued resilience.

Rising stock prices have helped fuel a surge in household net worth, debt service ratios remain below pre-pandemic levels, and most homeowners have locked in low interest rates on mortgages, BofA Global Research economists and investment strategists said in notes in March. "While consumption trends have started to slow, we expect the US consumer to remain healthy in 2024," the report said.

More growth ahead

Credit card loan growth has cooled from its initial pandemic rebound, though some issuers expect growth to continue to be robust this year.

JPMorgan Chase & Co. has projected low double-digit percentage growth in 2024, above the mid- to high single digits it considers normal. CFO Jeremy Barnum said the outlook includes expectations for some ongoing normalization in the balances customers carry from month to month, as well as marketing spending to add new accounts.

Banks have reported tightening standards for cards overall for six consecutive quarters in the Federal Reserve's survey of senior loan officers and that demand has declined or remained the same over five consecutive quarters. About 76.5% of respondents said they expect to keep card standards about the same over 2024, while 23.5% said they expect to tighten somewhat.

Despite the tightening and slackening demand, big issuers say they are in a fight for additional account holders.

"The landscape has always been competitive," Citigroup Inc. CFO Mark Mason said Feb. 20. "Whenever you have a business that's got good growth trajectory and good returns, it's going to be followed with competition."

"We're expecting continued loan growth, particularly around our cards portfolios," Mason said.