Consumer Credit Is Reaching Its Limits

 | Apr 04, 2014 | 10:00 AM EDT
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There are signs of problems becoming evident in the rate of growth of consumer credit. The first-quarter 2014 bank call report data won't be available for another month and I will follow up on this issue then. But for now, there are some points I want to make.

I last discussed consumer credit about two months ago with a focus on the money centers, which was a follow-up to my column from last August on the credit card companies. Since last August, the stocks of the three main publicly traded banks with high concentrations of their assets in revolving credit balances of their credit card clients, Capital One Financial (COF), Discover Financial Services (DFS), and American Express (AXP), have performed very well.

Since that column was written, Capital One has increased 20%, Discover is up 24%, and American Express is up 26%. However, most of that increased occurred during the last 4 months of 2013, and since then the stocks of these companies have been moving roughly sideways. Since Jan. 1, 2014 Capital One is unchanged, Discover is up about 6%, and American Express is up about 1%.

One of the issues I focused on last August was the stellar net interest margins (NIM) these companies enjoyed vs. the money centers. Since then however those margins have begun to decline along with their net earned interest and their earning assets.

Since last August, the NIM at Capital One has decreased from 6.53% to 6.39%, while American Express is roughly sideways moving from 5.37% to 5.41%.

Capital One's earning assets during the same period have declined from about $281 billion to $278.5 billion; and their actual earned income has declined from about $4.6 billion to $4.4 billion.

As with the sideways movement in the NIM at American Express, their earning assets and earned income have remained about the same at $68.5 billion and $938 million respectively.

Only Discover has continued to advance in all three categories. Discover's NIM has increased to a decade high of 9.17% from 8.65% last August. Its earnings assets have also increased from about $70.4 billion to $72.9 billion; and their actual earned interest has increased from about $1.52 billion to $1.67 billion.

Discover's performance appears to be the exception however, with the performance of Capital One and American Express being more indicative of both the slowing use of revolving credit and consumer credit more broadly.

Some of this is probably due to increased competition from the money centers as they've moved more aggressively into the consumer credit space. More importantly for investors right now is that it may be more indicative of consumer credit being generally less available in the aggregate, which would be consistent with declining earned incomes as evidenced in the shrinking payroll tax receipts I discussed last month in the column, The Most Important Data Point.

The latest data available from the Federal Reserve on consumer credit is only through this past January, but it is showing a rate of reduction in the use of revolving debt. There has been a commensurate increase in the use of non-revolving debt, which is predominantly made up of auto loans.

Auto sales have been increasingly strong over the past three years or so since subprime auto loans have become available again. Traditionally, strong auto sales have been an indicator of increasing consumer confidence and economic activity. One of the current issues, however, appears to be that auto sales are increasingly reflective of the substitution effect. Consumers choose to buy a new car in an attempt to compensate for their inability to be able to qualify for a mortgage to buy a home.

As I wrote about last month in the column, It's Still Time to Move Out, home sales for both new and existing properties, are not panning out this spring as hoped for. The preponderance of the available data weighs heavily toward a decrease in the rate of aggregate growth in consumption because consumers with access to credit have largely used it. Meanwhile, those without it can't consume at a rate that will drive the economy forward -- or the value of the stocks in the consumer lending space higher.

The lack of ability to make loans to consumers while the Fed is continuing to taper its quantitative easing program is also going to put increasing pressure on the ability of banks, especially the money centers, to continue to perform. I will write about that after the first-quarter bank call report data is available in about a month.

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