One month ago we warned that the toxic cocktail of Volcker-esque rates which have pushed the average credit card APR to a nosebleeding 21% and surging credit card balances would lead to a catastrophic surge in consumer (and corporate) defaults (see "Credit Card Balances Hit Record Above $1 Trillion, Suffer "Pronounced Worsening" Amid Surge In New Delinquencies") it is now Goldman's turn.
As Goldman analyst Ryan Nash writes in his latest note, after bottoming in September 2021, credit card losses have risen for the past 24 months. While the initial increases were likely reversals from stimulus, "since 1Q22 outside of the GFC losses are rising at their fastest pace in almost 30 years." Nash is concerned because "it is unusual for losses to rise outside of an economic downturn. In fact, of the prior five credit card loss cycles, three were characterized by recessions (early 90s, early 2000s and the great recession of 2008), while only two cycles (mid 90s and '15 to '19) the economy was not in a recession."
Given this backdrop, Ryan's did a deep dive comparing this cycle to the two prior non-recession credit loss increase / normalization cycles – 1) the mid-90s cycle and 2) the prior credit cycle (2015-2019) to asses where losses could be headed over the course of this cycle and the timing of it.
Losses currently stand at 3.63% (up ~150bps from the bottom) and based on Goldman's analysis, the losses will rise at least another ~130ps from current levels (to ~4.93%), implying we are roughly halfway through the credit loss increase cycle. He also thinks delinquencies could continue to underperform seasonality through the middle of next year and don't see losses peaking until late 2024 / early 2025 for most issuers. Relative to expectations, Goldman sees losses rising the most at COF, followed by DFS, which is hardly surprising following the credit card company's own charge-off rate forecast.