By Nina Trentmann and Mark Maurer 

As borrowers get a break on paying down credit-card, vehicle and other consumer loans, banks and financial institutions extending the relief face a balancing act in the months ahead.

Efforts to maintain customer relationships now could stave off a wave of potential defaults, finance professionals say. But companies with weakening consumer debt on their books need to figure out how much payment relief they can afford to provide, allowing that some consumers won't be able to pay later, potentially driving up losses for lenders.

Financial institutions from American Express Co. to JPMorgan Chase & Co. are offering delayed payments, fee waivers and other credit relief to consumers as more than 36 million Americans filed for unemployment claims in the weeks after many states locked down nonessential businesses to curb the spread of the coronavirus pandemic.

In doing so, finance chiefs are leaning on a playbook that recalls how they handled the record number of defaults and nonperforming loans arising from the 2008 financial crisis.

"So what is the carrot at the end? These are good customers who are in a bad time through no fault of their own, and we'd like to retain them as customers," AmEx Chief Executive Stephen Squeri said during an earnings call in April.

JPMorgan is providing payment relief for hundreds of thousands of consumer accounts, including offering 90-day grace periods for mortgage, auto and car payments, as well as waiving or refunding certain fees. The company also paused foreclosures and auto repossessions, Jennifer Piepszak, chief financial officer of JPMorgan, said on an April earnings call.

At the same time, financial institutions are tightening lending requirements for new loans -- including approving fewer consumers with low credit scores, asking for more income documentation and lowering spending limits on new credit cards.

Consumer debt was on the rise even before the pandemic hit.

Household debt rose to $14.3 trillion in the quarter ended March 31, $1.6 trillion higher than the 2008 record, according to the Federal Reserve Bank of New York. While auto loans increased to $1.35 trillion, credit-card debt came down during the quarter to $890 billion, according to the bank. That compares with $790 billion in auto loans and $870 billion in credit card debt at the end of 2008.

The New York Fed warned that its most recent numbers don't fully reflect the effects of the coronavirus pandemic yet.

Delinquencies and defaults on consumer debt trail the unemployment rate, and any prolonged period of joblessness likely will mean that more borrowers will fall behind on payments. The unemployment rate rose to a record 14.7% in April, overtaking the previous record rate of 10.8% for data tracing back to 1948. Payrolls dropped by 20.5 million workers in April and are expected to fall further.

Companies that want to be flexible with borrowers should make careful considerations.

"It depends on the cash position and the access to cash that each individual business has," said Philip Noftsinger, vice president of finance and corporate controller at CBIZ Inc., a professional-services company.

Ford Motor Credit Co. LLC, the financing arm of the U.S. car manufacturer, meanwhile, is offering changes to payment schedules as well as a deferral of monthly payments.

Ford Credit, for instance, had $28 billion in liquidity at the end of the first quarter and access to various funding sources to provide financing in the future, said Tim Stone, Ford Motor Co.'s chief financial officer, on an earnings call in April. Ford's credit arm -- which generated a significant portion of the auto maker's 2019 profit -- put aside about $1.2 billion in the first quarter -- up $718 million from the fourth quarter in 2019 -- to cover future credit losses.

That compares with $23.9 billion in liquidity the company had at the end of the first quarter of 2008. At that time, Ford Credit put aside $327 million to cover potential future credit losses, but changes to accounting standards make it hard to draw comparisons. Ford Credit said it had a net loss totaling $1.5 billion at the end of 2008 as a result of the crisis, compared with a net profit of $775 million in 2007.

Forbearance programs, such as those offered by car companies, allow lenders to avoid an increase in delinquencies in the short term, according to Fitch Ratings. "But it will likely delay the inevitable charge-offs," Fitch analysts said in note last month.

Delinquency rates on credit-card loans reached 6.77% in the second quarter of 2009, according to the Federal Reserve's Board of Governors. At that level of distress, consumers lean heavily on lenders.

American Express already is seeing signs of consumers in trouble. The company said of the 845,000 account holders that joined its customer pandemic relief program through mid-April, many already have made some payments since they enrolled, AmEx finance chief Jeffrey C. Campbell said in the April earnings call. This time around, the company's relief efforts provide a range of options to consumers, whereas in 2008, AmEx mainly provided short-term help to card customers.

Synchrony Financial, a credit-card issuer and provider of consumer financing tools, is waiving late fees and interest charges. It is deferring minimum payments for up to three months and extending certain promotions. About 800,000 account holders took advantage of these options during the first quarter, finance chief Brian Wenzel said on an April 21 earnings call.

How much risk companies take, and how much help consumers might need, will depend on the length and the severity of the economic downturn caused by the pandemic.

"You should see consumers come out of this less scarred on the debt and delinquency front, because the shock is going to be a lot briefer relative to what we had in 2008 or 2009," said Torsten Slok, chief economist at Deutsche Bank Securities.

The financial crisis had a lengthy recovery because the U.S. had to fix imbalances in certain markets, in contrast with the pandemic, which wasn't triggered by an economic imbalance, he said.

"Once we are on the other side, many of the borrowers that are suffering right now will be in a better financial position to meet their financial obligations. But we will have to have permanent forgiveness for some customers," said Tendayi Kapfidze, chief economist at LendingTree Inc., an online-lending marketplace.

Write to Nina Trentmann at Nina.Trentmann@wsj.com and Mark Maurer at mark.maurer@wsj.com

 

(END) Dow Jones Newswires

May 17, 2020 09:14 ET (13:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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