Frederic J. Brown | AFP | Getty Images
According to Goldman Sachs, credit card companies are suffering losses at the fastest pace in nearly three decades, barring the Great Financial Crisis.
Credit card losses bottomed out in September 2021, and while the initial increases were likely a reversal of the stimulus measures, they have risen rapidly since the first quarter of 2022. Since that time, the number of losses has only increased in recent history during the 2008 recession.
It’s far from over, the company predicts.
Losses currently stand at 3.63%, up 1.5 percentage points from the bottom, and Goldman sees them rising another 1.3 percentage points to 4.93%. This comes at a time when Americans owe more than $1 trillion on credit cards, an all-time high according to the Federal Reserve Bank of New York.
“We think delinquencies could continue to underperform seasonally through the middle of next year and don’t expect losses for most issuers not to peak until late 2024/early 2025,” analyst Ryan Nash wrote in a note Friday.
What is unusual is that losses increase outside of an economic downturn, he pointed out.
Of the past five credit card loss cycles, three were marked by recessions, he said. The two that occurred when the economy was not in a recession were in the mid-1990s and between 2015 and 2019, Nash said. He used history as a guide to determine further losses.
“In our view, this cycle resembles the characteristics of what was experienced in the late 1990s and somewhat similar to the cycle from ’15 to ’19, in which losses are increasing after a period of strong credit growth and have maintained a similar pace so far this cycle of normalization,” Nash said.
History also shows that losses tend to peak six to eight quarters after the peak of credit growth, he said. That implies the credit normalization cycle is only halfway through, hence the late 2024, early 2025 forecast, he said.
Nash sees the greatest downside risk Capital one financial, followed by Discover financial services.
– CNBC’s Michael Bloom contributed reporting.