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U.S. Economic Watch
31 January 2017
Economic Watch
What’s in Store for Consumer Credit?
Filip Blazheski
The ratio of consumer credit excluding student loans to household assets is historically low
The slowdown in the growth of student debt opens opportunities for releveraging in the other consumer
credit categories, especially credit cards and unsecured personal loans
While delinquencies are at historically low levels, they have started inching up, especially in energy
industry-exposed states
Consumer lending, especially credit cards, can be very profitable if risks are managed properly
Ultimately, stronger consumer credit depends on the continued solid performance of the economy in
general and the labor market in particular
U.S. banks are increasingly more interested in consumer credit. One needs to look no further for evidence of the
relative attractiveness of consumer lending than to the entry of traditional investment banks in the unsecured
personal loans business during the second half of last year. This brief analyzes the most important recent trends
in consumer credit, and what we can expect in the upcoming period in light of our baseline macroeconomic
scenario, which suggests continued economic expansion in the short- to mid-term.
Household Debt vs. Consumer Credit
Household debt growth started to outpace nominal GDP growth in the second quarter of 2016, for the first time
since the Great Recession. The reason it took 28 quarters (seven years) for this to happen was the heavy
mortgage deleveraging following the subprime mortgage crisis (Figure 1). Consumer credit, on the other hand,
which accounts for about 25% of total household debt, has been outpacing GDP for some time, its growth being
primarily a result of the strong expansion in student debt and more recently auto loans (Figure 2).
Figure 1
Figure 2
Relative debt levels
%
30%
20%
Consumer Loans
$ Trillion
HH and Non-Profit Debt to
Assets
HH and Non-Profit Debt to Net
Worth
Consumer Debt to HH and
Non-Profit Assets
Consumer Debt to HH and
Non-Profit Assets ex RE
10%
0%
55 58 62 66 69 73 77 80 84 88 91 95 99 02 06 10 13
Source: Federal Reserve & BBVA Research
Source: Federal Reserve & BBVA Research
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U.S. Economic Watch
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While the overall ratio of consumer credit to household assets has been remarkably stable, the ratio of consumer
debt ex-student loans to household assets is very low relative to historic values (Figure 3). As student loan
growth slows (Figure 4), further opportunities could be opening in the other components of consumer loans, as
long as the overall economic situation, especially employment, continues to improve.
Figure 3
Figure 4
Relative Debt Levels
%
Consumer Credit
% YoY
7%
40%
35%
6%
30%
25%
5%
20%
4%
15%
10%
3%
5%
2%
0%
Consumer Credit to HH Assets ex RE
1%
0%
-5%
-10%
Consumer Credit ex Student Debt to HH
Assets ex RE
Student Debt
Consumer Credit ex Student Debt
-15%
90 92 94 96 98 00 02 04 06 08 10 12 14 16
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: Federal Reserve & BBVA Research
Source: Federal Reserve, NY Fed & BBVA Research Calculations
Consumer Credit and Spending
Not surprisingly, consumer credit is highly correlated with consumer spending (Figure 5). The higher amplitude
of the consumer credit growth pattern is a result of its alignment with durable goods consumption (autos,
appliances, etc.), which tends to have larger swings compared to services and nondurable goods spending.
Spending on durable goods tends to be more cyclical than spending on nondurable goods because it can be
more readily postponed in times of economic weakness, as the services that these goods provide can be
maintained in the absence of new purchases, and also because of the discretionary nature of many durable
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goods. Furthermore, during an economic expansion, once consumers purchase what they need after their
economic situation improves, the demand for durable goods can decrease more rapidly compared to nondurable
goods.
Consumer credit growth has been outpacing personal consumption expenditures (PCE) since the end of 2011,
as has historically been the case in expansionary periods. The difference between the PCE growth rate and the
consumer credit growth rate is significantly affected by lenders’ willingness to extend consumer credit. We find
that higher willingness to lend leads to stronger consumer credit growth. According to our models, consumer
credit will continue to expand faster than PCE in 2017, but the difference will narrow (Figure 6) as the cycle
matures. That said, the environment remains supportive of solid consumer credit growth even beyond 2017, as
long as the positive macroeconomic developments, especially in regards to employment, persist.
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Black S., Cusbert T. (2010). Durable Goods and the Business Cycle. Reserve Bank of Australia Bulletin
https://goo.gl/94n85X
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Figure 5
Figure 6
Real Spending and Real Consumer Credit
% YoY, Constant $
Consumer Credit, PCE and Willingness to Lend
PP and Net % Balance (More/Less Willing to
Make Consumer Installment Loans)
20%
20
100%
10
50%
0
0%
Personal Consumption Expenditures
Consumer Credit
15%
10%
5%
0%
Difference Between Real Consumer Credit
Growth and Real PCE Growth
Forecast
-10
-5%
-10%
Willingness to Lend, 3QMA, 6 Quarters
Moved Forward (RHS)
-20
60 63 66 70 73 76 80 83 86 90 93 96 00 03 06 10 13
-50%
-100%
67 71 75 79 83 87 91 95 99 03 07 11 15
Source: Federal Reserve, BEA & BBVA Research
Source: Federal Reserve, BEA & BBVA Research
Bank Credit Sequencing
From what we have seen so far, consumer credit growth depends on consumer demand for goods and services,
as well as lenders’ willingness to extend credit. Willingness to lend is inversely correlated with delinquencies,
which tend to increase when GDP growth slows. Because of all this, lenders pay a lot of attention to the
business cycle. Predicting the next recession has proven to be very challenging, but what is certain is that the
future holds one in store. Historically, for banks, the consumer credit portfolio has typically been the first to
decelerate in the run-up to a recession, and has been the first to accelerate after one (Figure 7). The pattern
during the current expansionary period has been different (Figure 8) because real estate and consumer loans
Figure 7
Figure 8
Crosscorellograms of Recession Dummies with
Real GDP and Real Bank Loan Growth (‘59-‘16)
GDP and Commercial Bank Loans
% YoY
15%
Correlation Coefficient
0.4
10%
0.2
5%
0
0%
-0.2
-5%
Nominal GDP
-0.4
-0.6
C&I
GDP
C&I Loans
Real Estate Loans
Consumer Loans
-15%
Real Estate Loans
-20%
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
-0.8
-10%
Consumer Loans
-25%
09
Quarters Before/After Recession
Source: Federal Reserve & BBVA Research Calculations
10
11
12
13
14
15
16
Source: Federal Reserve & BBVA Research
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U.S. Economic Watch
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were slow to pick up, as households deleveraged after the recession and have dealt with higher levels of student
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debt compared to previous periods . Commercial and industrial (C&I) loans also rebounded earlier than they
would have otherwise due to the demand for financing of the shale oil and gas boom and the positive secondround effects it had on businesses in parts of the country exposed to the energy industry. Regardless, now that
the economy has rebalanced, it is likely that the sequencing will revert to its historic pattern, which would imply
that consumer loan growth will decelerate first as the cycle turns.
Consumer loans are not only the first ones to slow in a run-up to a recession, but also the first ones to show an
increase in delinquencies (Figure 9). That said, consumer credit still has several factors going in its favor this
time around: it picked up relatively late in the current expansion, lenders have been more conservative than
before the crisis, and the labor market has performed very well so far. All of this has contributed to a historically
low delinquency rate. According to the Federal Reserve, delinquency rates for consumer loans stood below
2.1% in 3Q16, compared to the lows of 2.7% in each of the last two expansions (3Q94 and 4Q05). Furthermore,
delinquencies in 3Q16 were just a notch above the record low of 2.0% in 3Q15 and 4Q15, and even this slight
increase could partially be explained by the economic slowdown in some parts of the country exposed to the
energy downturn. According to TransUnion data, while credit card and auto loan delinquency rates in 3Q16 were
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higher YoY in all states, the highest increases were generally in states heavily exposed to the energy industry
(Figure 11). Thus, the recent uptick in energy prices and the expected improvement in the energy sector and
thus in these states suggest that delinquencies will stabilize and stay close to the historically low levels, which
would be consistent with our baseline scenario. In hindsight, the current uptick in delinquencies (Figure 10) could
Figure 9
Figure 10
Crosscorellograms of Recession Dummies with
Real GDP Growth and Change in Delinquencies
(‘88-‘16)
Consumer Loan Delinquencies
PP YoY
0.8
1.5
1
1
Correlation Coefficient
0.6
1.0
1
0.4
1
0.5
0.2
1
0
-0.2
0.0
C&I Loans
-0.6
Real Estate Loans
-0.5
-1.0
0
0
Recession
Consumer Loans
Consumer Credit Delinquencies
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
-0.8
0
GDP
-0.4
1
-1.5
0
0
88 90 91 93 95 97 99 01 02 04 06 08 10 12 13 15
Quarters Before/After Recession
Source: Federal Reserve & BBVA Research Calculations
Source: Federal Reserve & BBVA Research
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Only a small portion of student debt is issued by banks, and the data analyzed in this section is for commercial banks only
The change in delinquencies in energy-industry exposed states (Alaska, Louisiana, North Dakota, Oklahoma, South
Dakota, Texas, West Virginia and Wyoming) was compared to the rest using standard tests, the change being measured
both as percent and percentage point difference. The average change in the energy-exposed states is statistically
significantly higher than the average change for the other states at 99% level of confidence
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prove to be temporary, and look like something in between the delinquency developments in the mid-1990s and
the ones in 2004.
Figure 11
Weighted Average Credit Card and Auto Loan Delinquencies by State, 3Q16
% YoY
Source: TransUnion & BBVA Research Calculations
Credit Cards and Personal Loans
Our outlook for credit cards and personal loans is optimistic. While in real per capita terms, auto loans and
certainly student loans exceed their pre-crisis levels, credit card debt and other consumer debt (which includes
unsecured personal loans) remain significantly below pre-crisis levels (Figure 12). As mentioned earlier, the
slowdown in growth of student debt should open an opportunity for releveraging. And while auto loan growth is
likely to continue, its growth rate will likely decline as a result of tighter credit standards (Figure 13).
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Figure 12
Figure 13
Auto Loans
% YoY and Net % Balance of SLOOS
Respondents (Tightened / Eased Credit
Standards)
Consumer Credit Per Capita
2016 $
15%
6,000
Auto Loans
Student Debt
Credit Cards
Other
10%
5,000
5%
4,000
0%
-5%
3,000
-10%
2,000
-15%
1,000
Motor Vehicle
Loans
Credit Standard
Net Tightening
-20%
-25%
0
07
03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: Federal Reserve & BBVA Research
08
09
10
11
12
13
14
15
16
Source: Federal Reserve & BBVA Research
Consumer Lending Profitability, Risks and FinTech Competition
Consumer credit, especially credit cards, can be more profitable than other types of loans, but also more risky.
We find that commercial banks with sustained above average RoA tend to have a higher share of consumer
loans and a lower share of C&I loans (Figure 14). On the other hand, these banks tend to have a higher share of
charge-offs to loans (Figure 15). This implies that the high performers are able to deliver higher RoA by
successfully managing the tradeoff between profits and risks. It is important to note, however, that these results
are affected by the performance of the credit card banks, which are generally in the “high performers” category.
Regardless, this implies that consumer loans, especially credit cards, as well as higher risk tolerance, can
improve commercial banks’ profitability as long as the risks are managed properly.
Because of the difficulty of managing the tradeoff between profits and risks, the credit card and auto segments
have not been targeted by technology companies so far, while the more straightforward segment of personal
loans has been disrupted. While commercial banks have upped their ante recently, FinTech firms have already
carved out a significant share of that market segment for themselves. According to TransUnion, around 26-27%
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of the unsecured personal loan balances in the first three quarters of 2016 were originated by these firms . If
banks are to hold onto their market shares in auto loans and credit cards, they will have to be innovative and
deliver excellent customer service, two areas where FinTechs have proven to be formidable competitors.
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Laki, J. (2016). Personal loan balances reach exciting new milestones https://goo.gl/CxRmXe
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Figure 14
Figure 15
Share of Consumer Loans in Loan Portfolio
%
5
Charge-offs to Total Loans
%
35%
3.5%
30%
3.0%
25%
2.5%
20%
2.0%
15%
1.5%
Average High Performers
10%
5%
Average Medium Performers
Average Low Performers
1.0%
Average High Performers
Average Medium Performers
0.5%
Average Low Performers
0.0%
0%
90 92 94 96 98 00 02 04 06 08 10 12 14
90 92 94 96 98 00 02 04 06 08 10 12 14
Source: SNL & BBVA Research Calculations
Source: SNL & BBVA Research Calculations
Bottom line
At the beginning of 2016, American Banker published an article that started with the following words: “We may
be in the early stages of a seismic shift in the macroeconomics of banking. Consumer lending is back on the
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rise, while the commercial sector is getting less attractive.” The fundamentals of consumer credit and our
baseline macroeconomic scenario imply continued opportunities in the consumer credit area, especially as the
growth of student debt slows down. The factors supporting this process include: low delinquency rates, solid job
formation, anticipated income growth due to a tightening labor market, and an improved outlook for energy
industry-exposed states. Consumer lending, especially credit cards, can contribute to banks’ profitability, but
since we are likely at an advanced stage of the credit cycle expansion, a particularly important factor for the
success of any lender is the ability to manage the tradeoff between risks and returns that consumer lending
entails.
DISCLAIMER
This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) BBVA Research U.S. on behalf of itself and its
affiliated companies (each BBVA Group Company) for distribution in the United States and the rest of the world and is
provided for information purposes only. Within the US, BBVA operates primarily through its subsidiary Compass Bank. The
information, opinions, estimates and forecasts contained herein refer to the specific date and are subject to changes without
notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been
gathered or obtained from public sources, believed to be correct by the Company concerning their accuracy, completeness,
and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.
5
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Banks are divided into groups by number of years of above average RoA in the 1990-2015 period
Cummins, C. (2016). Learn to Love Consumer Lending. https://goo.gl/6JDiYs
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