According to Goldman Sachs, credit card companies are experiencing the highest level of losses in nearly three decades, excluding the Great Financial Crisis. While credit card losses hit a low point in September 2021, they have been steadily increasing since the first quarter of 2022. The rate of increase is reminiscent of the recession in 2008.
Goldman Sachs predicts that these losses are far from over. Currently, losses are at 3.63%, up 1.5 percentage points from the bottom, and the firm anticipates them to rise another 1.3 percentage points to 4.93%. This is happening at a time when Americans collectively owe over $1 trillion on their credit cards, which is a record high according to the Federal Reserve Bank of New York.
Analyst Ryan Nash from Goldman Sachs believes that delinquencies could continue to perform worse than usual until the middle of next year, and he doesn't expect losses to peak until late 2024 or early 2025 for most credit card issuers. What is unusual about this situation is that the losses are increasing outside of an economic downturn.
Nash points out that of the previous five credit card loss cycles, three occurred during recessions. The two that occurred during non-recessionary periods were in the mid-1990s and from 2015 to 2019. He believes that this current cycle resembles the characteristics of those two periods, where losses increased following a period of strong loan growth.
Based on historical patterns, Nash predicts that losses tend to peak six to eight quarters after loan growth reaches its peak. This suggests that the credit normalization cycle is only halfway through, supporting the late 2024 and early 2025 prediction.
Nash identifies Capital One Financial and Discover Financial Services as the credit card companies with the most downside risk. It is important to note that this analysis was conducted by Goldman Sachs and is not guaranteed to be accurate.