Peak credit card loan losses might be coming into view after a jump in delinquencies in the third quarter.

Card delinquencies across US banks spiked 41 basis points quarter over quarter to 3.09%, according to S&P Global Market Intelligence data. That exceeds the most recent peak of 2.89% as of March 31, 2020.

Delinquencies lead net charge-offs (NCOs), or amounts that lenders deem unrecoverable, so further deterioration is anticipated after a sequential increase of 9 basis points in the industry's NCO rate to 3.57%, which is still below quarterly levels that prevailed in 2018 and 2019.

Lenders have tightened standards and loan growth has slowed down, but employment and household balance sheets remain strong.

"We think credit losses likely peak in 2024," BofA Global Research analysts said in a note on Dec. 6. "We think the current cycle plays out similar to the 2016-18 cycle where losses increased but stayed in check."

Skate where the puck is going

The BofA Global analysts observed that consumer finance stocks bounced well before an inflection in NCOs emerged during the financial crisis of the late 2000s.

Indeed, stocks like Capital One Financial Corp. and Discover Financial Services have surged since late October, supported by expectations for faster interest rate cuts by the Federal Reserve than previously anticipated and growing confidence over the potential for an economic soft landing. Closing prices for Capital One shares gained 45.4% from Oct. 24 through Dec. 15, putting them up 39.5% for the year, a better performance than the gain of 22.9% for the S&P 500.

The run-up has made some analysts wary. Consumer stocks "are pricing in an 'all-clear' on credit which seems premature given [delinquency] rates are still rising 35% [or more] for the card industry," Piper Sandler analysts said in a note Dec. 15.

"If we truly have avoided a recession, as the market appears to be implying, we would be constructive on credit-sensitive names in general," but the market seems to have already priced-in rate reductions, a soft economic landing and credit beginning to recover in late 2024.

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Still growing

One reason the BofA Global analysts are confident in the outlook is that the rapid growth in credit card balances since the middle of 2021 came after a sharp decline early during the COVID-19 pandemic.

"This is quite different than the '90s and mid-2000s when loan growth accelerated off an already solid level," they said. "Similar to the late 2010s, the macro backdrop will also be supportive with strong labor markets and favorable home price appreciation."

"An unemployment rate of 3.9% does not generate a lot of card charge-offs," Bank of America Corp. Chairman and CEO Brian Moynihan said on Dec. 5. The unemployment rate fell from 3.9% in October, the latest reading when Moynihan spoke, to 3.7% in November.

Other key measures of household finances also remain healthy despite the recent growth in card borrowing, lenders and analysts say.

"Consumer credit card debt accounts for only a 6.3% share of disposable personal income, a figure that is actually quite low by historical standards," Wells Fargo analysts said in Nov. 27 note. That could help support continued growth, even though the year-over-year rate of increase in bank credit card loans fell to 12.7% in the third quarter from a recent peak of 16.1% in the third quarter of 2022.

JPMorgan Chase & Co. said its card delinquencies had already normalized by the middle of this year, as anticipated, and that it still expects net charge-offs to normalize to pre-pandemic levels at the end of the year and into the first quarter of next year.

The bank expects credit card loan growth to decelerate, but still remain in robust double-digit territory next year, Marianne Lake, co-CEO of consumer and community banking, said on Dec. 5.

Despite increasing balances, borrowing on cards has not "yet fully normalized," Lake said. "Debt service levels are still reasonably healthy, flat year overyear and below pre-financial crisis."