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Consumer lenders face new challenges: each other

Now things are very good for consumer lenders. Probably too good.

Lenders’ share, including credit card, car, student and personal loan makers, surged this year thanks to its strong credit performance and belief that interest rates will rise. For many of these stocks, it’s not hard to imagine a further rise as part of a significant recovery in consumer spending and credit demand. Companies such as Ally Financial,

Capital One Financial,

LendingClub and SLM have all increased by more than 40% so far this year, nearly doubling the overall financial profits of the S & P 500.

Early concerns about credit problems due to pandemics have not been realized. But there is also reason for investors to be cautious about the long-term outlook now, as the current lending boom can eventually create higher default terms. Last week, Capital One’s longtime CEO Richard Fairbank provided some “pattern recognition” of what he called credit market physics. “This extraordinarily strong credit period could lay the groundwork for future credit deterioration as an industry point,” Fairbank said.

One of the risks is that stimulus measures, withholding other debts such as student and mortgage payments, and high collateral values ​​such as used cars can temporarily increase the creditworthiness of consumers. That, coupled with the lender’s excess liquidity caused by the flood of deposits, could “encourage lenders to grow for less elastic businesses,” Fairbank said.

Auto-lending seems to be one of the areas that can be overkill. Fairbank said auto-mortgage competition could be particularly fierce, as dealers often aggressively bid on lenders. Santander Consumer executives told analysts last week that the competition has “revived and in some ways is more intense than it was before Covid.”

The cheaper debt available in the capital markets attracts more lenders and drives tighter pricing. Subprime mortgages are more attractive because there are fewer lenders in the space, but it is even more important for lenders not to misunderstand the borrower’s financial position based on the availability of government stimulus.

It can take years for today’s suspicious underwriting to turn into bad debt losses. However, many lenders are currently trading above the ratio of prices to tangible assets leading up to the pandemic, so investors are advised to look far ahead. Indeed, higher rates will boost returns. However, competition between lenders plays a major role in how high interest rates can be obtained, and higher interest rates can be offset by slightly higher credit losses.

Long-term investors need to look for companies that are taking advantage of last year’s turmoil to drive growth, with the goal of robbing their rivals of good customers, such as boosting marketing spending. For example, American Express said last month that recently acquired new US consumer card members had higher average FICO scores than members acquired before the pandemic.

Macro decisions can also become increasingly important. Economic recovery, which is a sustainable and self-sustaining expansion as well as a rebound, may help lenders expand their pool of borrowers and continue to increase interest income even when margins are squeezed, while keeping credit insecurity. ..

Consumer and lender stocks may still be good bets, but simple money may have already been made.

Write to Telis demo at telis.demos@wsj.com

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Consumer lenders face new challenges: each other

Source link Consumer lenders face new challenges: each other

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