According to a new analysis by Goldman Sachs, credit card companies are accruing losses at the fastest rate in nearly 30 years, with the exception of the Great Financial Crisis.
Credit card losses hit their lowest point in September of 2021. Although the first increases arose from stimulus, they have continued to increase since the first quarter of 2022. Since then, the only period in recent history with a similar rate of increasing losses would be the recession of 2008.
Goldman predicted the pain for credit card companies is far from over.
Currently, the companies’ losses stand at 3.63%, 1.5 percentage points up from their lowest point. Goldman sees them increasing further still by another 1.3 percent to 4.93%. Meanwhile, according to the Federal Reserve Bank of New York, Americans presently owe over $1 trillion on credit cards, which is a record high.
In a note Friday, analyst Ryan Nash wrote, “We think 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.”
He pointed out the unusual aspect is losses are accelerating despite the nation not being in an economic downturn.
He said of the previous five credit card loss cycles, three of them occurred during recessions. Nash noted the two which occurred outside of recessions occurred in the mid-90’s and between 2015 and 2019.
Nash said, “In our view, this cycle resembles the characteristics of what was experienced in the late 1990s and somewhat similar to the ’15 to ’19 cycle where losses increase following a period of strong loan growth and has seen similar pace of normalization thus far this cycle.”
He pointed out that history indicates that losses will tend to peak roughly six to eight quarters following loan growth peaks. If that is the case, the credit normalization cycle is only half-way completed, which accounts for the late 2024 to early 2025 prediction.
He says the biggest downside risk will be for Capital One Financial, followed by Discover Financial Services.
