Consumer debt isn’t stressing banks

Everyone is stressing about consumer debt. Investors have been dropping the shares of big banks, credit-card specialists and younger fintechs because of fears about the pain that rising living costs and interest rates will inflict on borrowers. The weird thing is that households in the US, UK and much of Europe are in pretty good shape and showing few signs of financial strain.
The reasons to worry are obvious. JPMorgan Chase & Co is cutting hundreds of US home-loan staff because of a collapse in demand for mortgages as prime borrowing rates rush towards 6%. At the other end of the scale, valuations have tumbled among Buy Now Pay Later lenders such as Block Inc (formerly Square) or privately held Klarna Bank AB, as investors fret about slower spending and rising risks. Even shareholders of Goldman Sachs Group Inc reacted badly to a Bloomberg News report that Marcus, its online bank, would suffer another $1.2 billion loss this year — although that is due to its heavy investment in building the business, rather than its loans turning sour.
The world feels fragile, especially if you spend a lot of time looking at financial markets, and consumer sentiment has plummeted. But underpinning households — and potentially Western economies broadly — is the huge amount of savings and debt reduction during the Covid crisis. People started this year with spare cash equivalent to more than 13% of 2019’s gross domestic product in the UK, about 11.5% of GDP in the US and between 5.5% and 7.5% in Germany, France and Italy.
Household balance sheets are much stronger than before the pandemic. In the US, there are far fewer subprime car loans and credit-card borrowers than in the past, according to Matthew Mish, credit strategist at UBS Group AG. The trend toward financial health might have been accelerated by the lifestyle curbs and income support during Covid lockdowns, but the improvements had been underway since 2013.
In recent months, the share of borrowers missing debt repayments has been growing, but it is still at or below 2019 levels. “I don’t expect we will see a level of deterioration that is concerning in the next few months, although perhaps we will in the next few
quarters,” Mish says. “I’m concerned more with consumers’ willingness to spend than their ability to spend.”
Spending remains solid for now. US personal consumption expenditures did slip in May for the first time this year, but only slightly. There is no collapse in demand and spending on services continued to grow even if goods purchases were down.

—Bloomberg