Credit card delinquencies and net charge-offs are continuing to quickly climb back toward pre-pandemic levels, and major lenders are anticipating further deterioration if expectations for an increase in unemployment materialize.

The card delinquency rate across US banks rose another 18 basis points sequentially in the first quarter to 2.63%, narrowly below the 2019 fourth quarter's 2.85%, according to data from S&P Global Market Intelligence. Net charge-offs (NCOs), which follow delinquencies with a short lag, jumped 62 basis points to 3.18%, compared with 3.01% in the 2019 fourth quarter.

JPMorgan Chase & Co., the nation's biggest card lender, projected in May that its card NCO rate would increase from an anticipated 2.6% this year to nearly 3.5% in 2024 and above 3.5% in 2025, compared with 3.10% in 2019. It expects average NCOs of 3.5% in 2024 and 2025 under a central case in which unemployment peaks at 5.1% during a mild recession and expects average NCOs of 4.8% under a moderate recession in which unemployment peaks at 7.1%. Unemployment was 3.7% in May.

JPMorgan Chase has already set aside loss reserves for the central case, and "nothing is flashing amber or red," co-CEO of Consumer and Community Banking Marianne Lake said May 22.

"Broadly, we are still seeing normalization, not deterioration," CFO Jeremy Barnum said.

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Impact of unemployment

Unemployment is reassuming its role as the primary determinant of credit card loan performance as households deplete pandemic savings and higher interest rates start to increase debt service burdens.

The traditional relationship between the two had broken down as government assistance to households helped drive down card borrowing and keep cardholders current. The industrywide delinquency rate hit a longtime low of 1.54% in the second quarter of 2021, and NCOs bottomed at 1.70% in the fourth quarter that year.

Payment rates, or the percentage of balances that credit cardholders pay off each month, are now tapering, though they remain high by historical standards.

While card lenders expect unemployment to increase, they emphasize that customers' finances remain strong currently. "Consumers don't have the same cash flow that they had during the pandemic but overall are holding up pretty well," Discover Financial Services President and CEO Roger Hochschild said June 2.

Banks have reported tightening credit card loan standards for several quarters, though not as sharply as for commercial loans, and big lenders like JPMorgan Chase have described the moves as "surgical."

Tailwind in loan growth

Total outstanding credit card loan balances have recovered from a pandemic slump and continue to grow quickly.

The year-over-year growth rate ticked down from 16.1% in the third quarter of 2022 but remained strong at 15.5% in the first quarter this year, according to Market Intelligence data.

JPMorgan Chase's Lake said that revolving borrowing — or balances customers carry from month to month — has not yet fully normalized and "will be a tailwind for card loan growth into 2024."

Hochschild said Discover is tightening credit at the margin but continues to seek loan growth. "One of the things we've seen through past cycles, if you start cutting back too early, you can leave a lot of good business on the table."