MARKET CONDITIONS REBOUND FOR CONSUMERS AND BUSINESSES AS HOPEFUL INDICATORS DRIVE DOWN DEBT, DRIVE UP ON-TIME PAYMENTS

Despite persistent challenges from the pandemic-induced recession, the credit card market continues to show resilience. The chief economists of North America’s largest banks see improvement in business and consumer credit market conditions over the next six months, according to the latest quarterly report from the American Bankers Association (ABA).

The Q1 2021 ABA Credit Conditions Outlook highlights the results of the ABA Credit Conditions Index. The report represents a suite of indices derived from the quarterly outlook for credit markets produced by ABA’s Economic Advisory Committee, which is comprised of chief economists from major banking institutions across North America. Readings above 50 indicate that, on net, the economists expect business and household credit conditions to improve, while readings below 50 indicate a deterioration.

“The ABA Credit Conditions Index provides a barometer on the direction of credit markets going forward,” said Beata Caranci, senior vice president and chief economist at TD Bank Group and the current chair of ABA’s Economic Advisory Committee. "Going forward, this quarterly analysis offers another tool to help bankers, policymakers and the public assess the outlook for consumer and business credit conditions.”

The Q1 2021 report finds that near-term expectations for credit quality and availability rebounded for both consumers and businesses after bottoming out last summer. Specifically, all three components of the new Index increased in the first quarter of 2021, though each component remains below the 50-point threshold. This suggests that, while bank economists expect credit market conditions to remain soft over the next six months, their nearterm pessimism has waned since the survey was last conducted in September.

“Both lenders and borrowers fared better last year than we would have expected as a result of the severe dislocations caused by the pandemic,” said ABA senior economist Rob Strand. “A robust federal response has been a critical element of the recovery, and banks continue to work with consumers and businesses struggling to make ends meet.”

In the first quarter of 2021:

• The Headline Credit Index jumped to 43.8, its second consecutive quarterly improvement after bottoming out last summer. While the current reading represents the strongest credit market conditions since mid-2018, the Index remains below 50, signaling that bank economists expect some continued weakness in credit market conditions over the next six months.

• The Consumer Credit Index rose to 45.3, the highest reading since mid-2019, as expectations improved for both consumer credit quality and availability compared to last quarter. Bank economists expect consumer credit availability to increase over the next six months, while a slight majority expect consumer credit quality to deteriorate.

• The Business Credit Index climbed to 42.2, the strongest reading in more than two years. The increase was driven by improved expectations for both business credit quality and availability; though similar to consumer credit respondents, business credit quality is expected to deteriorate over the next six months.

“Although credit quality is still expected to worsen over the first half of the year for both consumers and businesses, the overall outlook for credit markets has improved significantly since the summer and fall,” said Strand. “As widespread inoculations against the virus and new fiscal stimulus measures help heal the economy, banks will continue to work closely with policymakers, consumers and businesses to ensure that affordable credit remains available and recovery strengthens.”

Meanwhile, credit card market resilience is also reflected in the ABA’s latest quarterly Credit Card Market Monitor. Monthly purchase volumes rebounded strongly across risk groups in the third quarter of last year, even as the ratio of credit card credit outstanding as a share of national disposable income remained near an all-time low.

The February 2021 Monitor, which reflects credit card data from July through September 2020, found that monthly purchase volumes jumped more than 20% quarter-over-quarter, though credit card purchases remain well below pre-pandemic levels. Meanwhile, credit card credit outstanding as a share of national disposable income rose slightly by six basis points to 4.54%, though it remains near an all-time low (nearly 100 basis points below its Q4 2019 level).

The share of cardholders who are transactors (those who pay their monthly balance in full) rose 1.5 percentage points to an all-time high of 33.7% for the second straight quarter. At the same time, the share of revolvers (those who carry over a monthly balance) fell another 1.7 percentage points in the third quarter to an all-time low of 40.7%. Meanwhile, the share of Dormant accounts ticked up a tenth of a percent to 25.6%.

“The record-high share of transactors illustrates the resilience of U.S. consumers,” said Strand. “Though many people are still unemployed, a combination of restrained spending and continued government support has left many consumers well-positioned to manage credit card payments.”

The effective finance charge yield (which measures interest payments relative to total outstanding credit in the market) decreased 22 basis points in the second quarter to 12.33% due to the declining share of revolvers and the Fed’s benchmark interest rate remaining near zero. Outstanding credit card credit fell to its lowest level since the second quarter of 2017.

“Credit card issuers continue to take a cautiousbut-balanced approach toward account activity,” said Strand. “The increase in super-prime accounts also reflects that many cardholders have improved their financial position and credit scores during the pandemic.”

Results of this and all previous reports can be found at aba.com.

–Paul Williams Brand Publishing Writer