Credit card net charge-offs are increasing. Here’s why banks aren’t too worried.

The Federal Reserve recently ended its most aggressive interest rate hike campaign in 40 years. Many expected that rising interest rates would send the U.S. economy into a rapid recession, but consumers have shown resilience in a way that has surprised many.

Over the past few years, consumers have spent much of their excess savings and borrowed more money. Last year, consumer credit card debt ended 2024 at $1.13 trillion amid record-high credit card interest rates.

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Additionally, cracks began to appear in consumer credit. From the beginning of 2022 to the end of last year, the amortization rate of commercial bank credit card loans increased from 1.72% to 4.24%, exceeding the pre-pandemic level.

In the first quarter, banks once again saw an increase in net charge-offs on consumer credit card loans. But many big banks don’t sweat it. Here’s why:

Consumer credit card net charge-offs have increased over the past few quarters.

JP Morgan Chase (J.P.M. 0.64%), bank of america (BAC 0.44%), capital one (C.O.F. 0.47%)and Explore financial services (DFS -0.52%) We’re one of the largest credit card consumer lenders in the country, and we’ve seen firsthand how consumers are doing.

Since interest rates began to rise, consumer credit card net charge-offs (NCOs) and delinquency rates have also increased. NCO is the amount of debt that the bank is unlikely to recover and which will be written off. Delinquency rates indicate the percentage of loans that are delinquent and can be a key indicator of where charge-offs are going. These indicators can be important indicators of the health of a bank’s customer base.

Net charge-offs and delinquencies on consumer credit card loans have increased uniformly across banks for several quarters. Banks with more resilient customer bases, such as JPMorgan Chase and Bank of America, have seen their credit metrics deteriorate at a lower rate. Still, the overall upward trend is consistent with companies with broader customer bases, such as Capital One and Discover.

Chart by author.

Here’s why banks are encouraged by this:

Banks were not overly concerned about the increase in net charge-offs due to the slowing delinquency rate trend. Capital One saw its 30-day or more delinquency rate decrease 0.32% to 3.67% in the fourth quarter. CEO Richard Fairbank noted that seasonal factors, including tax refunds, helped the decline, but the bank remains encouraged by current circumstances.

Fairbank said consumers have been a source of strength for the economy over the past few years, thanks to a resilient labor market. “Rising incomes have kept consumer debt service burdens relatively low by historical standards,” Fairbank said.

JPMorgan Chase echoed this sentiment in its earnings call last month, with CFO Jeremy Barnum saying, “Consumers are staying financially healthy, supported by a resilient labor market.”

Chart by author.

Discover noteworthy delinquency stabilization and see if your credit lives up to your expectations. Bank of America CFO Alastair Borthwick was also encouraged by the slowing pace of delinquencies and said BofA’s net charge-offs would remain level over the next quarter or two.

Improving your credit metrics can lead to that coveted “soft landing.”

Investors expect the Federal Reserve to cut interest rates this year as long as progress is made in lowering inflation. According to CME According to the FedWatch Tool, the market expects the federal funds rate to be lower by about 0.75% by next year.

The Fed is hoping to lower inflation and achieve a “soft landing” without a recession, and Capital One CEO Richard Fairbank said, “We’ve clearly seen what we think is a kind of landing.”

Consumers have shown resilience over the past few years. Big banks see this as a source of sustained economic strength, which, along with the growth of the U.S. economy, could bode well for bank lending.