US CONSUMER CREDIT RISK

Transcription

1 US CONSUMER CREDIT RISK Trends and Expectations THIRD QUARTER 2012 A Survey by the Professional Risk Managers International Association October 2012 w w w. P R M I A. o r g PRMIA thanks our survey sponsor FICOTM

2 ACKNOWLEDGEMENTS The Professional Risk Managers International Association (PRMIA) is a higher standard for risk professionals, with over 65 chapters around the world and more than 85,000 members. 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 FICO (NYSE:FICO) delivers superior predictive analytics that drive smarter decisions. The company s groundbreaking FICOTM use of mathematics to predict consumer behavior has transformed entire industries and revolutionized the way risk is managed and products are marketed. FICO s innovative solutions include the FICO Score the standard measure of consumer credit risk in the United States along with industry-leading solutions for managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world s top banks, as well as leading insurers, retailers, pharma businesses and government agencies rely on FICO solutions to accelerate growth, control risk, boost profits, and meet regulatory and competitive demands. FICO also helps millions of individuals manage their personal credit health through FICO: Make every decision count. PRMIA would like to extend special appreciation to The Center for Decision Sciences at Columbia Business School for their assistance in analyzing the survey responses. The Center for Decision Sciences brings together scholars from a range of fields who share an interest in human decision making. The center facilitates research and understanding on consumer behavior, the implications of decision making on public policy, and the neurological underpinnings of judgment and decision making. The center is housed within Columbia Business School, widely acknowledged as being among the world s top business schools. To learn more, visit 2 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

3 EXECUTIVE SUMMARY Since the beginning of 2010, PRMIA and FICO have regularly polled bank risk management professionals regarding their expectations for the next six months and the impact of current events on their field. During the third quarter of 2012, risk management professionals expressed similar sentiment to that expressed earlier in the year, continuing the gradual trend toward greater optimism. This quarter s survey found that bankers expected delinquency rates on every type of consumer loan except student loans to remain flat or decrease. Furthermore, for the second straight quarter, the majority of respondents expected the supply of credit to satisfy demand for all types of consumer loans. The optimism extended to small business lending. By more than a two-to-one margin, respondents said that both the approval rate for small business loans and the total amount of credit extended to small businesses would increase rather than decrease, and more than half of all respondents predicted the overall supply of small business credit would meet demand. However, the survey did find continued concern about the student debt crisis, and respondents said the supply of new home loans will barely keep pace with demand amidst signs that the housing marketing is beginning to rebound. Key findings and expectations for the next six months: Most (75.7%) believe that the level of mortgage delinquencies will decrease or stay the same, over 4% more than last quarter, and over 10% more than Q % expect a drop in student loan delinquencies, compared to only 6.9% in Q % expect a decrease in interest rates, the highest number predicting an decrease since Q Only slightly less than half (44.5%) expect that the average balance on consumer credit cards will decrease or stay the same a majority (55.5%) believe average balances will increase. Half (52.9%) believe the total number of delinquencies will stay the same. Most risk managers, when asked personally, report a desire to pay off their current mortgage or other debt (if cash were available) rather than investing those resources in the stock market or other investments. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 3

4 SURVEY DETAILS KEY FINDINGS AND ANALYSIS Delinquency Predictions Remain Steady and Hopeful Looking at the industry as a whole, over the next six months, do you expect: (check all that apply) Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly Continuing a trend reported in Q1 and Q2, respondents feel optimistic that the level of delinquencies in five of the categories surveyed will either stay the same or decrease. For a Q3 survey, this is very encouraging, as historically sentiment on delinquencies dips slightly during Q3. Concerning mortgage delinquencies, less than a quarter (24.2%) expect an increase. This is down 2% from Q2 and down over 11% since Q1. Similarly, 26.3% expect increases in home equity line delinquencies, a 2% drop since Q2. Credit card delinquency predictions remain consistent with Q2, with only 32.6% believing the amount of delinquencies will increase (compared to 31.4% in Q2). The level of small business loan delinquencies as well as auto loan delinquencies show the same trends as previous categories, both with nearly half of respondents predicting no change. Our last category, student loan delinquencies, shows that risk managers are still a bit nervous. 61.1% look for levels of student loan delinquencies to rise, compared to 63.7% in Q2 and 51.2% in Q1. These fluctuations are further evidence of a field concerned and prone to change sentiment on student loans given changing financial conditions. 4 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

5 SURVEY DETAILS Consumer Credit Outlook Optimistic, but Not Enthusiastic Looking at the industry as a whole, over the next six months, do you expect: (check all that apply) In consumer underwriting, the positive trends noted in previous surveys continues, albeit slightly more reserved in Q3. Many (54.8%) expect interest rates on consumer credit cards to remain the same; however, this is down from 66% last quarter. At the same time, most (81.7%) expect the approval criteria for credit and loan products to stay the same or become more stringent. A majority (55.5%) still look for consumers to be comfortable carrying a higher average balance over on their credit cards. Slightly more (44.7%) expect an increase in the volume of credit or loan applications than expect the amount to stay the same (42.3%). Interestingly, 47% believe credit requested by consumers will increase, down over 9% from Q2. Many (42.3%) feel that the approval rate for consumer credit and loans will remain the same, although a larger number (22.1%) look for the approval rate to decrease compared to Q2 (18.8%). Finally, 82.2% predict that the amount of consumer credit extended by lenders will increase or stay the same, compared to 84.3% in Q2. Overall, the underwriting predictions of this quarter continue the optimistic trend observed in Q1; however, the excitement has died down substantially over Q2 and Q3. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 5

6 SURVEY DETAILS New Delinquency Predictions Remain Stable But a More Guarded Attitude is Observed Looking at the industry as a whole, over the next six months, do you expect: (check all that apply) Risk managers continue to predict a rise in credit-line increase requests (50.5%). A majority (52.9%) believe that the total number of delinquencies on consumer lending products will stay the same, with only 18% predicting a decrease. In contrast, 37.2% predict that new delinquencies will increase over the next six months, with only 18.3% down from 30.2% in Q2 predicting the total will increase. It is interesting to note that while risk managers have varied their opinions in other areas, existing customer credit increases; total numbers of delinquencies, and the total number of new delinquency predictions have remained very stable, the only exception being less optimism regarding new delinquencies in the next six months. This suggests that the delinquency picture is expected to remain consistent, but if tipped, will tip in a less than desirable manner. 6 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

7 SURVEY DETAILS Optimism for Small Businesses Looking at the industry as a whole, over the next six months, do you expect: Increase significantly Increase somewhat Remain the same Decrease somewhat Decrease significantly The survey in Q2 regarded small business predictions positively, and Q3 continues this trend, slightly attenuated. Similar to Q1, a large majority (61.9%) predict that the amount of credit requested by small businesses will increase, and while this is down from Q2 (69.1%), it is still up from Q (56.5%). Approval rates, which almost half in Q2 predicted would stay the same, are still optimistically regarded, with 40.6% expecting an increase. Finally, slightly less than half (42.3%) feel that the amount of credit extended to small businesses will increase over the next six months. In the report of Q2 s survey, it was speculated that it would be interesting if Q3 reversed the trends noted in Q1 and Q2 as it did in However, this does not appear to be the case. The predictions of Q are markedly better than Q3 2011, when, for example, 28.9% felt that the amount of credit extended to small businesses would decrease. Today only 18.9% report this prediction, a 10% drop. Overall, small business predictions are more optimistic in Q versus Q3 2011; however, they still show a small drop from the excitement of Q1 and Q2. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 7

8 SURVEY DETAILS Current Topics: Credit Supply & Paying Off the House Looking at the industry as a whole, over the next six months, do you expect: (check all that apply) The supply of credit for residential mortgages to The supply of credit for mortgage refinancing to The supply of credit for credit cards to Fall significantly short of demand Fall slightly short of demand Meet demand Slightly exceed demand Significantly exceed demand The supply of credit for auto loans to The supply of credit for small business loans to The supply of credit for student loans to 0% 10% 20% 30% 40% 50% 60% The survey devotes a number of questions each quarter toward current topics. In Q2, a majority felt that the supply of credit for new mortgages and mortgage refinancing would meet demand, a shift from Q1 when many felt the supply would fall short of demand. In Q3, with regard to credit supply for mortgage refinancing, credit cards, and auto loans, most respondents felt that supply would equal demand. However, the race became much closer for supply of small business loans (where 46.7% expect supply to fall short) and student loans (where 44.2% expect supply to fall short). While those areas are somewhat contentious, a near majority (49%) look for supply of credit for residential mortgages to fall short of demand. This suggests that within new mortgage supply, risk managers are noticing evidence of a lack of availability, while refinancing supply appears sufficient. How much do your institution's capital goals influence your risk decisions? Also asked this quarter was the extent to which the respondent s institution s capital goals influenced their risk decisions. Not surprisingly, over two thirds (68.7%) responded that the capital goals of their institution significantly or somewhat influenced their own risk decisions. 8 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

9 SURVEY DETAILS If you personally had enough cash to pay off your mortgage right now, what would you be most likely to do? Pay off your mortgage now Invest your cash in the stock market Invest in bonds and fixed-income vehicles Keep your cash in CDs or savings accounts Pay off other debts The survey this quarter also asked an interesting hypothetical question: What would you do, personally, if you had enough cash to pay off your mortgage at this moment. The most popular answer, paying off the mortgage now, garnered 35% of respondents. Options such as investing in the stock market and paying off other debts pulled strongly, and only a small percentage (10.5%) would keep their cash in a CD or savings account. This suggests that the desire for an amount of liquid cash on hand is dwarfed by the desire to remove debt. Even investment opportunity appears less attractive than personal debt relief among risk management professionals. When it comes to data or Big Data, what is your biggest concern? Too much useless or dirty data Using the data before it gets stale Customer privacy Regulatory compliance Competitors having better data management In regards to other influences of those decisions, the survey next asked respondents about their concerns regarding Big Data. The most common answer given (32%) was a skepticism regarding the amount of useful data provided by Big Data in general. Additionally, concerns about timeliness of data, customer privacy concerns, regulatory compliance issues, and a worry about competitors having better data were expressed. This suggests that there is no silver bullet solution to better integrating Big Data risk managers are weary of it for a number of reasons. Which area of retail banking (in the US) do you believe currently offers banks the most attractive risk/reward? Credit cards Residential mortgages Auto lending Small business lending In conclusion, the survey finished by asking respondents about which area of retail banking, in the United States, currently offered the most attractive risk/reward tradeoff. Nearly a third (32%) believe credit cards are the most attractive currently, while slightly over a quarter (25.5%) went with residential mortgages. The overall close nature of the results, however, suggests that all areas are more or less attractive for future gain. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 9

10 SURVEY DETAILS Historical Analysis Over 10 quarters, a variety of trends have been noted by the survey. These include: Predictions of decrease in mortgage delinquencies (31.2% expect a drop), home equity decreases (29.7%), and credit card delinquencies (27.7%) continue to set record highs higher than any point in the survey s 10 quarter history. The Q2 low in expectations for fewer student loan delinquencies (6.9%) has reversed, with 12.8% now expecting a drop (the second-highest level in survey history). 10.4% expect a decrease in interest rates, the second highest level of predictions in this category only Q shows more predictions of decrease (15.1%). Only 14.8% believe that the average balance on credit cards will decrease over the next six months. This continues to be the lowest level reported since the survey began. Overall data remains fairly consistent between Q2 and Q3, suggesting less volatility in the financial picture for risk managers. Mortgage Delinquencies Home Equity Delinquencies 1 0 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

11 Credit Card Delinquencies Auto Loan Delinquencies 40% 35% 30% 25% 20% 24% 37.2% 22.4% 32.1% 21.1% 34.4% 30.4% 25.3% 21.9% 15% 10% 15.4% 5% 0% Q Q Q Q Q Q Q Q Q Q Auto loan delinquencies percent of respondents expecting a decline Student Loan Delinquencies Small Business Loan Delinquencies 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 15.4% 13.3% 12.7% 12.8% 11.3% 9.2% 7.6% 9.1% 8.5% 6.9% Q Q Q Q Q Q Q Q Q Q Student loan delinquencies percent of respondents expecting a decline Total Loan Delinquencies A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 1 1

12 Your job (select most appropriate) 8.9% 26.2% RESPONDENT PROFILE 15.8% Chief Risk Officer Functional leader 7.9% Portfolio/product management Business/risk analyst Other 41.1% 41.1% of respondents identified as a Business or Risk analyst, the most populous job classification, with more identifying in this role in this sample than in previous surveys. While analysts make up the largest group, the panel also included Chief Risk Officers (8.9%) and functional leaders (15.8%). Finally, slightly less than a third, 26.2%, indicated their job as other, no doubt reflecting a changing landscape in which multiple responsibilities may be assigned to one person. What is your area of responsibility (check all that apply)? The majority of respondents (62.9%) managed a mortgage portfolio, with 42.4% administering lines of credit. This is a small reversal of previous surveys, which typically had most respondents managing credit lines, suggesting this sample may be particularly knowledgeable regarding the housing market. Slightly less were responsible for a card portfolio (36.4%). Our smallest group of respondents, those working with student loans (14.6%), is similar in size to previous surveys. While the switch in the two top categories occurred, as noted above, the sample remains fairly stable compared to previous administrations of the survey. 1 2 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

13 What is the size of your institution (by total assets)? What is the business orientation of your institution (select the most appropriate)? 6.1% 7.7% 36.7% 8.2% 41.3% Up to $5 billion $5 $10 billion $10 $20 billion $20 $40 billion $40 + billion Slightly over a third of respondents (36.7%) worked in an institution managing up to $5 billion in investments, while 22% worked in an institution that managed between $5 $40 billion. The remaining respondents worked in institutions managing over $40 billion, suggesting substantial variation in the views of the respondent panel based on institutional size. Lastly, while two thirds of our respondents (67.3%) worked in a full service bank, wealth management, investments, or retirement services, at least 1 out of 10 (11.6%) worked with a mortgage lender, and at least 1 out of 10 (11.6%) worked with a discount or self-service financial service. What is the geographic reach of your institution? A plurality of respondents worked at a firm with global reach (40.6%), with a slightly smaller number (34%) working in a firm with national reach. Slightly less than a quarter (24.3%) worked in a firm with regional or local reach. Finally, a small number (1%) worked with an Internetbased firm. 40.6% 16.2% 1% 8.1% 34% Global National Regional Local Internet-based A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 1 3

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