July 20, 2017 / 2:39 PM / a year ago

Fitch: U.S. Consumer Strength Moderates Credit Deterioration

(The following statement was released by the rating agency) NEW YORK, July 20 (Fitch) The continued financial resilience of the U.S. consumer has prolonged a period of extremely strong asset quality among many U.S. consumer lending segments, says Fitch Ratings. However, U.S. consumer loan losses at financial institutions are at unsustainable cyclical lows and a more meaningful amount of credit deterioration should be expected over the near to medium term. This will particularly be the case should unemployment claims begin to reverse after reaching multi-decade lows. The extent to which weaker credit performance will be a challenge for individual consumer lenders will vary depending on the diversity of their lending activities and the extent to which they have strengthened capital and loss reserves to absorb higher losses. Their willingness to tighten underwriting standards in recent quarters in anticipation of a weaker macroeconomic environment will also be a key factor. Reflecting these dynamics, Fitch believes diversified banks are better positioned than monoline lenders to weather meaningful erosion in consumer asset quality. <iframe allowfullscreen src="//e.infogram.com/us_financial_obligations_ratio?src=embed" title="US Financial Obligations Ratio" width="550" height="611" scrolling="no" frameborder="0"> Overall, the U.S. consumer's financial condition is stronger than it was prior to the last recession. Unemployment is near cyclical lows, the consumer savings rate (savings as a percentage of disposable income) is in line with the long-term average, the financial obligations ratio (debt service as a percent of disposable income) is below the long-term average and consumers' net worth is at all-time highs as a result of strong stock market performance and home price appreciation. Fitch maintains its view that U.S. GDP growth will rise in 2017 and 2018. Increases in interest rates unaccompanied by meaningful economic growth and expanding wages could pressure consumer asset quality as it would result in increased debt service (for floating-rate obligations) and elevated refinancing risk without the benefit of higher income to absorb these costs. We believe that recent Fed rate hikes are part of long-term monetary policy normalization that is aligned with current macroeconomic conditions and the outlook. <iframe allowfullscreen src="//e.infogram.com/us_consumer_debt_load?src=embed" title="U.S. Consumer Debt Load" width="550" height="674" scrolling="no" frameborder="0"> In first-quarter 2017, U.S. consumer debt returned to its pre-crisis peak of $12.7 trillion after falling to a post-crisis low of $11.2 trillion in 2Q13. The student loan and auto segments have had the most pronounced increases, although credit card debt has also accelerated recently. Between fourth-quarter 2008 and first-quarter 2017, student loan debt more than doubled to $1.3 trillion while auto loans increased by 48% to $1.2 trillion. Over the same period, the much larger mortgage component of consumer debt declined by 6.8% to $8.6 trillion from a peak of $9.3 trillion, reflecting substantially tighter underwriting amid increased regulation and the exit of many non-bank lenders. Fitch believes that credit cards and auto loans, particularly retail credit cards and subprime auto loans, will be the consumer loan segments most likely to see asset quality deterioration in the near to medium term. Higher loss rates and delinquencies have already begun to materialize. Drivers of weaker credit performance include stronger loan growth in recent years, increased competition leading to looser underwriting standards in the post-financial crisis period (including greater exposure to subprime borrowers) and, in the case of auto lending, residual values that have been supported by unsustainably high used vehicle prices. According to Federal Reserve surveys, banks have begun tightening underwriting standards in both segments over the past several quarters. <iframe allowfullscreen src="//e.infogram.com/net__of_us_domestic__banks_tighteningloose ning_auto_underw riting_standards?src=embed" title="Net % of U.S. Domestic Banks Tightening/Loosening Auto Underwriting Standards" width="550" height="690" scrolling="no" frameborder="0"> The potential systemic impacts of a rapid deterioration in either credit card or auto lending are limited relative to pre-crisis residential mortgage lending. Both segments are much smaller than residential mortgage debt with shorter loan durations and smaller loan balances. Contact: Nathan Flanders Managing Director Financial Institutions + 1 212 908-0827 Fitch Ratings 33 Whitehall Street New York, NY Michael Taiano Director Financial Institutions +1 646 582-4956 Justin Patrie, CFA Senior Analyst Fitch Wire +1 646 582-4964 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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