Composure While Under Pressure

For those in the credit market, equanimity is a virtue that will be tested.  Nothing can prove more unsettling than bad news, and in today’s current financial environment, bad news is in abundance.  But as the federal government executes its rescue package and creditors across the board reassess their lending guidelines and risk mitigation procedures during this economic calamity, those with a more grounded approach to growth will certainly survive.

This may seem a bit optimistic, but there are strong companies out there.  For example, during the frenzy of the housing boom, banking institutions that focused on core business operations rather than diving headlong into the housing market for quick growth have faired much better than their competitors.  A good example of this is PNC Financial Services Group, whose profit actually rose 19 percent in the second quarter while also finalizing its 2008 acquisition of Sterling Financial, a multibank holding company.

Though there are some bright spots, there are indeed also causes for anxiety.  The general upward trend in delinquencies and charge-offs across many debt types has lasted for over a year and economic conditions, especially unemployment, remain troubling.  But just how bad could the deterioration in credit quality get?

In a recent article, credit card charge-offs were projected by a research firm as potentially reaching a total of $96 billion for 2009.  How likely is such an increase of charged off credit card debt? 

If you were to take the total outstanding receivables of the top 15 largest credit card issuers – the top 10 make up between 85-90 percent of the market – these institutions would have to maintain an average charge-off rate of at least 12 percent for the entirety of 2009.  Impossible? No, but highly improbable. 

Even considering a job market that is likely to remain weak, a 12 percent charge-off rate seems difficult to imagine.  In June of 2003, when the unemployment rate reached 6.3 percent, the charge-off rate within the Standard & Poor’s Credit Card Quality Index was just a little over 7.0 percent.  During the weak employment environment between 2002 and 2003, the index reported an average charge-off rate of 7.0 percent.  With an average charge-off rate of 7.0 percent, you’d be looking at a total of about $54 billion in charged off card debt by the end of 2009 – not taking into consideration tightened lending standards or any increased emphasis in pre-charge off collection efforts in the current economic environment.

It will get worse in financial services before it gets better. But a little perspective goes a long way before declaring another Great Depression.