Consumer & Card Portfolios:  Are Your Monitoring for Symptoms of COVID-19 Contagion Spread?

Stocking up your home with additional food and supplies in preparation for possible quarantine is not cheap.  Most transactions will take place using credit cards.  Balances will rise, transaction fees collected, and billing cycles will proceed as normal.  Then what?

It is not good enough to look at the consumer or card portfolios on the surface and then declaring that the credit risks have been identified.  That is like declaring that you are neither a contagious carrier nor at risk for COVID-19 because you have no symptoms.

It is critical to monitor portfolios for leading key performance indicators (KPIs) of credit quality degradation.  

Outsized spending patterns will lead to larger balances; however, lower individual consumer income will first be apparent in card portfolios based on a rise in the percentage of accounts that make the minimum payments compared to those card holders that paid in full or had a previously different payment pattern.  This will initially be a profitable event as interest will start ticking on outstanding balances. 

With companies experiencing revenue shocks from COVID-19 events, hourly and gig workers will feel the financial impacts first, but that does not mean salaried workers are immune.  Understanding the borrower’s occupations may help detect initial vulnerability to layoffs, cutbacks, or commission changes.

Without visibility into the root cause of the portfolio shift, the card issuer misses the chance to take appropriate action to manage the portfolio risk.  Further, lack of understanding the customer may mean a lost opportunity to deepen the customer affinity and relationship with rate reductions in exchange for larger minimum payments or even temporary suspension of default interest rates. 

An example of the direct and derivative consumer portfolio risks is the shut-down of sporting events.  Temporary or permanent employees of the food vendors, food distributors, or cleaning crews, are vulnerable to event cancellation as a second-degree employment risk.  Taking this a step further, third-degree employment risks are food manufactures, micro-breweries, and the uniform company.

While we do not yet know how the economic stimulus associated with the National Emergency declaration may impact short-term income loss, the lasting impacts to consumer credit portfolios are even less certain.

Is your bank proactively monitoring the leading KPIs of portfolio credit quality based on known current events?  Do you have a mitigation plans under development?  Or will you wait until late payments escalate and loss reserve increases are necessary? 

Private-label card issuers, community banks, middle-market banks, and large institutions should understand their consumer credit portfolios from these perspectives and have mitigation plans in place.  Investors will want to know these things on your next earnings call.  Board members should be asking these questions.  Regulators will expect that you understand these risks.

Failure to know, communicate, and plan to mitigate risk could result in a loss of confidence in management.

While Coronavirus is—and should be—creating much anxiety due to the factors beyond the bank’s control, it also provides targeted opportunities to strengthen relationships with clients.

Fully identifying and addressing hidden credit issues will enable the bank’s leadership to manage community spread of COVID-19 within the consumer portfolio, because you cannot manage what you cannot see