U.S. lenders Bank of America, Discover, JP Morgan and Citigroup all announced today that for the first time this year, credit card default rates fell in July. That may be the last of the good news in consumer finance for a while.
Curiously, consumer lending on household loans show a marked trend of loosening, even as most other types of lending tightened. The conclusion seems to be that people have mostly been using cheaper home loans to pay off credit card fees this year.
A major hint that this phenomenon is taking place is in the exception to falling numbers of defaults: Capital One is still seeing credit card defaults rise. That's probably because of its significantly higher percentage of lower-income customers, represented in its higher credit card fees. (Low-income customers are less likely to own homes to borrow against, obviously.)
In terms of what this means for financial institutions, there are two things, principally -- and neither is very optimistic. The first is that consumers are getting much more wary of using high-interest credit to purchase everyday and luxury items such as groceries, iPods and 52-inch flat screens. In other words, they would rather just pay down the interest and put the card in the drawer for a rainy day. That's not good for lenders, whose income growth is massively dependent on free-spending customers.
Secondly, the two sets of figures imply that people are extending home loans in order to be more fiscally conservative, as opposed to being more aggressive or speculative. That means that junk real estate assets such as mortgage-backed securities are unlikely to appreciate in value for some time, at least intrinsically.
Therefore, third quarter earnings for investment banks are likely to look very similar to the first and second quarter ones, with a high dependency on trading profits and little focus on areas such as lending and prime finance. With less volume in the market, profits probably won't be as great as they were previously.
In terms of commercial banking, however, things are likely to be tougher still. For while consumer consolidation and payment of loans may have served the firms well in the first two quarters, now that most of that process appears to have taken place, it's hard to see where their income is going to come from.