The US Consumer Has Cracked: Discover Plunges After “Shocking” Charge-Off Forecast
One week ago we looked at the latest consumer credit data where we found not one but two flashing red alerts:
First, the total amount of credit card debt hit a new all time high, which however was to be expected from one of the most consistently increasing series across all US economic data, and one which predictably is correlated to the US savings rate which is at all time lows.
Second, thanks to the Fed’s crusade to spark a great recession, the average rate across US credit cards just rose to an all time high 19%+
Summarizing these ominous trends we concluded that…
The combination of record high credit card debt and record high credit card interest is nothing short of catastrophic for both the US economy, and the strapped consumer who has no choice but to keep buying on credit while hoping next month’s bill will somehow not come. Unfortunately, it will and at some point in the very near future, this will also translate into massive loan losses for US consumer banks; that’s when Powell will finally panic.
And while the big US banks are diversified enough – and flooded with enough reserves for now – to deflect attention from spiking charge offs rates on their balance sheets, even though as we discussed last week the credit loss provisions (a hedge against a spike in bad debt) across the Big Four banks did in fact jump the most in a decade (excluding the covid shock)…
… some of the smaller credit-card companies can no longer avoid the reality that the US consumer has finally cracked and a wave of defaults is coming.
Presenting Exhibit A: Discover Financial Services (DFS), a credit card issuer which traditionally targets to low to middle-income households, and which yesterday reported earnings that were so scary, Wall Street has uniformly dubbed them “shocking.” But while the bulk of the company’s historical results were actually not all that bad, it was its forecast that a stunner: in a presentation on its website, DFS forecast that its charge offs would climb as high as 3.9% this year (it gave a range of 3.50% to 3.90%) which is more than double the 1.82% net charge off rate it booked for all of 2022 and was about 100bps higher than the 2.8% consensus estimate…..
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