Lenders Are Seeing a Bottom for Consumers
Anticipated return to normal for credit trends may bode well for spending
More consumers have been struggling to pay off their debts, and are likely tightening their belts. Thankfully for the economy, others can pick up the slack.
Federal Reserve data at the end of last year showed that borrowers on cards and auto loans were moving into delinquent status at the fastest pace in several years. Some more recent readings, though, contain signs of a slowdown in that deterioration. Data on card loans collected by analysts at Jefferies showed the delinquency rate slipping 0.18 percentage point from February to March, better than the usual seasonal trend.
This would be consistent with what many lenders are saying. The economy has been working through what remains of the big bump in income and savings that many consumers experienced during the pandemic and its aftermath, which led to a lending boom now reverberating in that jump in late payments. Following that, trends seem to be returning to normal, even if many consumers are still feeling the squeeze of higher borrowing and other costs.
Digital consumer lender Upstart UPST -7.19%decrease; red down pointing triangle on Tuesday told analysts that it believes “the wave of elevated defaults propagating from the abrupt stimulus and de-stimulus of the economy in 2021 is now at or very close to its peak,” and that it anticipates higher revenue from fees generated by lending in the second half of the year than in the first half.
“We feel like this sort of pandemic and postpandemic stimulus effect is really running its course,” Chief Financial Officer Sanjay Datta told analysts. “So, that gives us some comfort that we’re kind of back to the world that we know.”
The JPMorgan Chase Institute, which studies the bank’s anonymized account data, wrote in an April note that the most recent trends suggested that “many consumers have depleted their excess savings and are returning to more routine saving behavior.”
Others were also seeing signs that the market was adjusting to the new lending conditions. Equifax Chief Executive Mark Begor told analysts this week that “while the subprime consumer is working, inflation has pressured them, so there’s no question delinquencies went up,” causing lenders to pull back. But he noted that this pullback is generally “bottoming out,” and that there are signs of growth in subprime lending again, though at a lower level than the last cycle.
Investors for now seem to be taking a cautious view. Upstart shares were down about 10% on Wednesday. Affirm AFRM -9.46%decrease; red down pointing triangle shares also dropped about 10%, even though the buy-now-pay later lender reported quarterly volume above analyst expectations and didn’t see a year-over-year change in its delinquency rate on monthly installment loans. Executives told analysts that because the summer is a “seasonally high delinquency rate time,” the next move in delinquencies is “more likely up than down.”
But it isn’t clear that all spending trends are going to be affected by this adjustment to more normal credit patterns. Shopify SHOP -19.61%decrease; red down pointing triangle, the payments and e-commerce provider, said that “we think the consumer remains resilient.” Affirm said it has the flexibility to do things like subsidize the cost of borrowing to attract more shoppers with stronger credit.
Executives at Toast TOST 13.53%increase; green up pointing triangle, which provides payments and other services to restaurants, said on Tuesday that while first-quarter gross payment volume per location was down 2% year over year, that after January’s tough weather the trend had “bounced back” to similar to what was seen at the end of 2023. Shares of Toast were up more than 10% on Wednesday.
What may turn out to be the case is that consumers who aren’t as squeezed by higher debt or less available credit can pick up the baton from those who have run out of steam. Those who can spend probably will.