As the lingering impact of the pandemic abates (at least somewhat), as job growth signals economic growth and as consumers keep spending, we may be poised to see a shift from debit spending back toward credit. Earnings season is in full swing, and the slew of first-quarter earnings from banks have flashed signals that the pendulum may indeed swing.
The most obvious sign that things may shift is the fact that the big banks that reported last week – among them J.P. Morgan, Citi, Bank of America and Wells – released billions of dollars in reserves taken through the past year in anticipation of losses. Those losses did not materialize, as consumers opted, by and large, to pay down debt. Stimulus checks helped, of course, and management on the bank calls took note that consumers have been building up their savings accounts. It might make sense that as individuals and families build what could be termed “emergency” funds, they may feel more comfortable about taking on more debt moving forward.
As Jennifer Piepszak, J.P. Morgan’s CFO, told analysts on the first-quarter earnings call last week, “consumer sentiment has returned to more normalized levels, reflecting increased optimism. We’ve seen debit and credit card spend return to pre-pandemic levels, up 9 percent year on year and 14 percent versus 1Q ’19, despite T&E remaining significantly lower.” Travel and entertainment are key areas of credit spend. As economies reopen and vaccines become ever more widespread, the venues and destinations that are integral to those verticals (think theaters and resorts) will see more activity.
Piepszak noted on the call that T&E spend was up more than 50 percent in March compared to February, and the bank saw “similar growth across CX loyalty and ultimate reward travel bookings.” The company is expecting lower card losses in the periods moving forward.
Citi’s CEO Jane Fraser noted on her firm’s call that higher payment rates on loans act as a headwind to revenues, but also benefit delinquency and loss trends. “The good news is that we’re seeing the recovery in spend, which should continue, and our credit portfolio is proving to be quite resilient,” she said on the call.
CFO Mark Mason said in his own commentary that loan volumes have been down in branded cards by roughly 15 percent. “While those loans are down, payment rates remain high. That helps from a cost of credit point of view. And purchase sales are starting to show some good signs. So branded cards purchase sales were flat year over year. The retail services purchase sales were up 4 percent year over year,” he said. In the effort to get more traction in cards, he stated that “the card dynamic here is about ensuring that we get the timing right as it relates to market reentry … it’s about a responsible reopening.”
To that end, Bloomberg reported that issuers are retooling and re-focusing their card efforts. By way of example, Capital One Financial Corp. is offering a 100,000-point sign-up bonus for consumers who open Venture Rewards cards, and American Express is offering 125,000 membership rewards points to some Platinum card applicants.
Separately, Bank of America CEO Brian Moynihan said on his firm’s earnings call that “we’ve reinstated all our credit standards back to where they were before the pandemic. And we remain highly focused on capturing loan growth as the economy expands and continues to recover.” Consumer card losses should continue to decline, too. And he noted that Zelle comprises “half the credit card charge volume used by our consumers to make payments now.” In terms of the pipeline that might signal a boost to credit spending in the months to come, card applications increased in each of the last three quarters.
“But the good news is, you watch January or February or March,” Moynihan said, with vaccinations gaining ground, “and you’re starting to see the purchase numbers go up.”
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