US credit card defaults risk blowing up smaller companies

21 January 20231 year ago babelfish

US consumption has always been based on credit, even if, recently, short-term financing, above all by credit card, has greatly exceeded savings, laying the foundations for a situation of insolvency of the system in the medium term, as can be see from the following graph

This super-credit phenomenon increased strongly in 2022, when consumption was high, but state aid due to covid ended. However, the growth in interest rates on consumer credit, linked to the monetary tightening of the FED, was significant, posing a high risk of insolvency

As Zerohedge notes, credit card insolvency will not bring major problems to the US banking sector, also because this is, at the moment, well capitalized, and has reserves to face these losses. If anything, the impact will be on the companies that manage credit cards, starting with the smallest ones, therefore weaker in dealing with these problems. An example is Discovery, which issues cards mainly to customers with medium or medium-low creditworthiness, which is expected to see very strong growth in insolvencies in 2023, obviously to the detriment of profits.

DFS has forecast its charge-offs to rise to 3.9% this year (it provided a range between 3.50% and 3.90%), which is more than double the net charge-off rate of the 1.82% which it recorded for all of 2022 and was around 100bps higher than the consensus estimate of 2.8%. In reality, in recent years these values were kept artificially low by very low interest rates and state aid, but the awakening for consumers risks being very bad and involving the weakest companies in the sector.

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The article US credit card defaults risk blowing up minor companies comes from Scenari Economics .

This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/gli-insoluti-delle-carte-di-credito-usa-rischiano-di-far-saltare-le-societa-minori/ on Fri, 20 Jan 2023 10:00:01 +0000.