Credit card delinquencies, net charge-offs trend higher in August (NYSE:SYF)

Credit card delinquency rates continue to creep up while net charge-off rates also edge up, indicating that consumers are still in fairly good shape.

The average card delinquency rate increased seven basis points to 2.74% in August, and now stands 10 bps above the August 2019 level, according to data from the eight credit card issuers tracked by Seeking Alpha. The average net charge-off rate of 3.45%, up 4 bps from July, is 12 bps below the prepandemic level.

The softer trends bring the metrics to the lower end of the “normalized” range, said Baird analyst David George. “Losses and delinquencies are slowly rising particularly for non-prime borrowers but remain well controlled and below pre-pandemic levels,” he wrote in a note to clients.

Meanwhile, the amount of borrowing is also increasing at a consistent pace. The eight credit card issuers had $476.4B in receivables outstanding to consumers in August, up 0.8% from July and 13% from a year ago.

The August net charge-off data has positive implications for Capital One’s (NYSE:COF) Q3 earnings, said Oppenheimer analyst Dominick Gabriele, who points out that consensus is at 4.70% for domestic card vs. the likely ~4.50% range in Q3.

Synchrony Financial (NYSE:SYF) may also turn in better Q3 net charge-offs than sell-side analysts are expecting. That consensus is about 22 basis points too high for NCO rate of 4.89%, Gabriele said.

Oppenheimer’s Gabriele remains cautious about the credit card sector given rising net charge-offs and late fee regulation. He still believes “American Express (NYSE:AXP) is the way to ride out the next ~six months.” The company’s Q4 volume could be pressured from student loan repayments, but EPS is likely intact, he said.

Recall that in the months after the onset of the pandemic, massive fiscal stimulus led to much lower than usual delinquency and net charge-off rates. Most of that support is now gone. Student loan repayments, though, restart in October, leaving the potential for credit metrics to soften even more.

“With card loss normalization remaining in-line-to better-than expected at this point in the cycle, we remain focused on leading indicators (delinquencies, unemployment, bankruptcies, etc.), but believe credit trends remain healthy,” said Baird’s George.

Most of the earnings impact from expected consumer weakness and higher unemployment may already have occurred as banks have built reserves over the past several quarters, he said. “We believe reasonable credit losses are more than priced into the card stocks under coverage, and we would be adding Capital One (COF) on weakness,” George added.