Consumer Re-Leveraging Raises Debt Delinquency Concerns

As consumers continue to seek and receive more credit, the latest quarterly survey of U.S. and Canadian bank risk professionals found expectations for delinquencies on auto loans hit their highest level since Q4 2012, and expectations for delinquencies on credit cards reached their highest level in two years. In the survey from FICO (NYSE:FICO), a leading predictive analytics and decision management software company, 34 percent of respondents expected delinquencies on auto loans to grow in the next six months, while 28 percent expected delinquencies on credit cards to increase.

Despite those expectations, the survey, conducted for FICO by the Professional Risk Managers’ International Association (PRMIA), found re-leveraging shows no signs of slowing. In the survey, 58 percent of bankers expected average balances on credit cards to increase over the next six months, with 9 percent expecting balances to go down. In addition, 44 percent of bankers polled expected the amount of credit extended to consumers to increase over the next six months, while 14 percent expected the amount of new credit to decrease.

Data from the U.S. Commerce Department showed consumer spending rising steadily throughout 2013, including a 0.5% increase in November. And data from the Federal Reserve found revolving credit for U.S. consumers reached a three-year high in October.

“While the delinquency predictions in our survey aren’t alarming, lenders will be keeping a close eye on these trends,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “Banks are walking a fine line – trying to grow their lending portfolios without taking excessive risks. But given that credit card delinquencies are near their lowest level since the Fed began tracking them in the 1990s, a small uptick is to be expected and shouldn’t spook lenders. A slight increase in delinquencies is normal when availability of credit expands and borrowing increases.”

Similar Priorities on Both Sides of the Atlantic

In this survey and a similar one executed at the same time among European bank risk managers, respondents were asked about their institutions’ priorities in 2014. The top three answers were the same in each survey – improving risk management systems, growing profitability from existing customers, and improving the customer experience.

“These results are consistent with the feedback we hear from bank clients every day,” said Mike Gordon, executive vice president for sales, services and marketing at FICO. “Banks are trying to balance risk and growth by focusing on the known quantity – their existing customers. Banks are making big investments in creating more personalized and relevant experiences for customers in an effort to build loyalty and drive better financial performance.”

Small Business Lending Appears Healthy

North American survey respondents were generally optimistic about small business lending in the latest survey. Sixty-seven percent of those polled said the supply credit for small businesses would satisfy demand over the next six months. Moreover, 40 percent of respondents felt the approval rate for small business loans would increase, compared to 12 percent who felt the rate would decrease.

In terms of actual credit extended to small business in the next six months, 46 percent of bankers surveyed said the amount of new credit made available to small businesses would increase, while 12 percent said the amount would decrease.

A detailed report of FICO’s quarterly survey is available at https://www.prmia.org/sites/default/files/references/Fico4thQuarterDec2013F.pdf. The survey included responses from 289 risk managers at banks throughout the U.S. and Canada in November 2013. FICO and PRMIA extend a special thanks to Columbia Business School’s Center for Decision Sciences for its assistance in analyzing the survey results.

The Professional Risk Managers’ International Association (PRMIA) is a higher standard for risk professionals, with 65 chapters and more than 90,000 members worldwide. A non-profit, member-led association, PRMIA is dedicated to defining and implementing the best practices of risk management through education, including the Professional Risk Manager (PRM) designation and Associate PRM certificate; webinar, online, classroom and in-house training; events; networking; and online resources. More information can be found at www.PRMIA.org.

FICO (NYSE: FICO) is a leading analytics software company, helping businesses in 80+ countries make better decisions that drive higher levels of growth, profitability and customer satisfaction. The company’s groundbreaking use of Big Data and mathematical algorithms to predict consumer behavior has transformed entire industries. FICO provides analytics software and tools used across multiple industries to manage risk, fight fraud, build more profitable customer relationships, optimize operations and meet strict government regulations. Many of our products reach industry-wide adoption. These include the FICO® Score, the standard measure of consumer credit risk in the United States. FICO solutions leverage open-source standards and cloud computing to maximize flexibility, speed deployment and reduce costs. The company also helps millions of people manage their personal credit health. FICO: Make every decision count™. Learn more at www.fico.com.