Since the pandemic, consumers have posted more cash on the balance sheet thanks to savings from the pandemic and from stimulus checks. But in 2022, consumers began to use those savings, accumulate debt, and now face inflation and high interest rates. All these factors combined to increase the cost of borrowing, which reduces their savings.
Despite all of that, many Bank CEOs report that low-income and low-income populations see their money grow faster than most. buy income. That theme is also reflected in the bank’s recent earnings results. This is what is happening.
JPMorgan Chase vs. Discover Financial Services
There are two JPMorgan Chase (JPM 0.86%) and Find Financial Services (DFS 1.09%) The major lenders recently reported their fourth-quarter earnings results and provided early guidance for the full year 2023.
JPMorgan Chase reported that it expects the cost of the debt service provider (NCO). to jump from 1.47% at the end of 2022 to about 2.6% at the end of 2023. NCO looks at bad debt as a percentage of total i is credit card debt.
Remember that at the beginning of 2022, JPMorgan expected its NCO rate to come to 2%, and it came down to 1.5%. But even if the NCO rate fell to 2.6% it would still be slightly below the bank’s credit card NCO rate in 2019 before the pandemic.
In his earnings call, CFO of JPMorgan, Jeremy Barnum, said that spending in the lower income segment is set at a faster pace and the bank expects spending for this segment to return. in the first stage of the disease in the third quarter of the year.
If we go to Discover (which has most of its credit card loans), the NCO of the bank ended in 2022 at 1.82%. Management expects the NCO credit card rate to rise to between 3.5% and 3.9%, a rate higher than the NCO rate while the in diseases. Discover’s CFO John Greene says that consumers with FICO scores below 660, which the bank classifies as close to high, “the impact from the economy is definitely being felt.”
If you look at JPMorgan Chase’s third-quarter regulatory filing, more than 87% of the bank’s customers had a FICO score above 660, and 12.6% of its customers below 660 FICO. Discover had a wider spread, with 83% of its credit score above 660 and about 17% below.
What does it all mean?
Although the percentage breakdown may not seem like a big difference between JPMorgan and Discover, we don’t know exactly how important the FICO score is in these companies.
After all, above and below 660 can mean many things. In addition, bank Loan amounts can vary greatly by just a fraction of a percent.
After all, it’s not the end of the world if Discover realizes that it has more bad credit losses than JPMorgan. That should happen, given the number of credit cards each has. It depends on how the management manages the debts through the cycle and whether they are adequate reserves.
I like both JPMorgan and Discover as stocks, but Discover is more vulnerable right now because it serves a larger number of low-income borrowers than it does. then affected by macroeconomic forces. A worse-than-expected economic situation could lead to a larger increase in bad loans among this population.
Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz he has no position in any of the shares mentioned. The Motley Fool has insider options and recommends JPMorgan Chase. The Motley Fool recommends Discover Financial Services and Fair Isaac. The Motley Fool has the notification system.