Consumer Lending Expected to Rebound in 2011: Analysts

One might argue that the only thing harder than getting a job the last two years — or Congress to agree — was getting a consumer loan. Bank analysts expect 2011 to be a little better, however, at least in the area of consumer lending.

Several bank analysts are forecasting that lenders will grow their credit card, auto and commercial loan portfolios over the course of the year.

The trends will impact debt collection agencies, which have been increasingly competing for accounts due to shrinking charge-off volume and delinquencies.

After the recession began in 2007, charge-off rates among the five largest credit card issuers soared amidst record unemployment levels, and lenders responded by expanding their collection agency network, said Kaulkin Ginsberg Director Michael Lamm. Now banks are reporting fewer charges-offs and delinquencies.

According to data filed with the Securities and Exchange Commission, bank charge-offs began to slow last year and have steadily declined since the second quarter of 2010. In December, the average charge-off rate for the five largest issuers was 8.99 percent, down from 10.68 percent a year earlier (“Credit Card Charge-Offs and Delinquencies Fall Again,” Jan. 19).

Charge-off rates are still well above historical five year averages of about 6.3 percent of total card portfolios. But they have declined enough for some lenders to trim their collection agency networks, especially since new lending has dried up.

One recovery manager for a U.S. firm with major credit card operations told insideARM.com that it has cut back on the number of vendors it uses because the volume of work has reduced substantially. The firm had no immediate plans for additional cuts to its vendor network in 2011, but said “if volume continues to decrease more than we think, we will need less vendors.”

Lamm said the latest trend is a blow to collection agencies that gained new business during the charge-off surge and had hoped to grow their lender-agency relations. But he said an uptick in consumer lending will lead to future business or improved collection rates if the unemployment rate improves.

“Not all of those (new) borrowers will be the perfect customer. It just may be a question of how long it takes some to default. It goes back to job growth,” Lamm said.

Neenan noted that she anticipates modest growth in lending in the credit card sector because delinquencies and weekly unemployment claims are declining.

“Creditors are conservatively optimistic,” said Fitch Ratings Senior Director Megan Neenan. “Lenders are feeling more comfortable with the state of the consumer.”

Auto loans, which have remained relatively strong throughout the recession, also are expected to increase due to pent up demand and because domestic manufacturers have increased production and are ready to finance deals to sell their new cars, Neenan said. She added that some auto manufacturers already resumed zero percent finance offers and some lenders have loosened down payment requirements or are offering longer terms.

Corporate commercial loans should also see some strength as the economy improves. But mortgages, including home equity loans, should continue to slide because the housing market still has not stabilized and consumers are reluctant to tap their home’s equity for non essential purchases.

Neenan stressed that lending won’t be as robust as it was pre-recession, partly because of continued high unemployment. She expects most credit card offer applications to go out to the prime market. Likewise, only consumers with top credit scores will qualify for the auto manufacturers’ zero finance offer. There still will also be plenty of auto finance opportunities for the subprime market.

“People will want to keep a car to get to work or look for a job,” she said.