Weekly News Digest 8 May 2020

Data from NY Fed shows credit cardholders paying down balances in Q1, while survey reveals cut credit limits for one in four since pandemic hit

American households had just taken on a record level of debt when the novel coronavirus hit, according to newly published data from the New York Federal Reserve. For the quarter ending on 31 March, its figures (which lag the reality by a month) show that the total amount rose by 1.1 percent to reach $14.3 trillion, topping the previous high from 2008. But, as so often in data releases during this crisis, there is a silver lining: consumers had been working down their outstanding credit card balances, to the tune of $34 billion in the first quarter, a larger amount than seen in the same span last year, according to the NY Fed's findings. It was a different and relatively untroubled world in which this latest round of household debt data was collected, but how things stood for American consumers before the pandemic took hold is of vital importance as government and policymakers start to look ahead, however contingently, at rebuilding the country's economy.

One in four American cardholders have now had their credit limit reduced, according to a survey by CompareCards, a LendingTree company. Issuers are also dealing with a decrease in interchange revenue due to reduced consumer spend. Bank of America noted in a regulatory filing last Friday that, once account rewards and partnership payments had been accounted for, interchange fell by 12 percent compared to the equivalent period in 2019."Banks may look to tweak rewards to claw back some of this revenue", commented David Hickey, head of research at Verisk Financial Research. "However this risks further disincentivising spending, which could worsen the situation for the industry."

Silver linings are to be found too in Britain, where the central bank, although modelling losses of £80 billion ($99bn) for the country's banking sector should the economy shrink by a projected 14 percent in 2020, sees sufficient capital levels and regulatory adjustment to withstand the accompanying balance sheet pressures. That bill of health however came with a caveat from the Bank of England's deputy governor Jon Cunliffe, who asked banking executives to ensure support for the economy was forthcoming and to not repeat their behaviour in the wake of the 2008-09 financial crisis; such support would be in their own self-interest, he noted, as unsupportive lenders "could worsen their own capital positions by around a full percentage point".

Quarterly bank results across Europe have continued to observe an imperative that has become common in the latest round of earnings releases: loan loss provisions. Royal Bank of Scotland's profit halved, for example, thanks to a set-aside of £802m. (Interestingly, RBS also revealed that its digital brand, Bó, drew in a mere 11,000 customers since launching in the early winter and has now been axed.) Across the Channel, BNP Paribas has provisioned half a billion euro for possible losses on loans. Italian banks meanwhile offer a mixed picture, although capital levels are in better shape than one might expect after years of disciplined repair. UniCredit reported a loss of €2.7bn for the quarter, while rival Intesa Sanpaolo estimated a three billion euro profit: a "conservative" figure, the chief executive told analysts: "My expectation is that we can do better".

Executives at Commonwealth Bank of Australia seem to have cause for optimism too, with figures showing signs of improvement in spending on payment cards in the latter half of last month. Although spending fell by a tenth year-on-year in those two weeks, that was half the fall that had been recorded in the previous fortnight. "The improvement came across a range of goods and services," reports Reuters, "while online sales lifted sharply, with retail items rising by 110 percent compared to the same period a year earlier".

To end, links to some other stories of interest this week...

Global: PayPal saw more transactions on first day in May than Black Friday
UK: Virgin Money blocks over 30,000 cards
US: Visa results reveal early lockdown impacts
US: MetaBank, Fiserv win contracts to issue Visa prepaid stimulus cards