Capital One Expects Recession By Year-End, Hammered By Bad Debt Provisions

Richard Fairbank, the CEO of Capital One, has contradicted the belief that the overall spending power of Americans is a true representation of their financial well-being. He believes that a small group of extremely wealthy individuals are thriving, while the majority of Americans are struggling to cope with the effects of core inflation.

It is a well-known fact that Americans have been relying on their credit cards to manage their expenses.

The CEO of Capital One has highlighted that the percentage of customers who are more than 30 days late on their credit card payments has increased by 134 basis points to 3.66%, which is the highest it has been since March 2019.

This trend is expected to worsen, as banks have not yet caught up to the delinquencies with charge-offs, which is the rate at which banks incur losses for debt that they no longer believe will be repaid. Fairbank expects that charge-offs will return to 2019 levels by the middle of the year, lagging behind the industry by a quarter or two, just as it happened during the pandemic and global financial crisis.

Furthermore, the write-off rate for Capital One’s US credit-card portfolio almost doubled to 4.04% ($1.7 billion) in the first quarter of this year, compared to the rate from a year earlier. The Virginia-based lender also reported that provisions for credit losses increased to $2.8 billion in the quarter ended in March, up from $677 million a year ago. The reason behind this anticipated loss is the current reality of the situation.

“We are assuming a material worsening of labour markets with the unemployment rate rising from today’s very low levels to above 5% by the end of 2023,” the CEO told analysts on a conference call.

“We are also assuming adverse effects from inflation and some further worsening of consumer profiles from the flip side of their extraordinary outperformance in the earlier period during the pandemic.”

In other words, Fairbank anticipates an upcoming recession, as The Federal Reserve has predicted that the unemployment rate will be at 4.5% by the end of the year, which they have referred to as a “shallow recession.”

This information should not come as a surprise to those who are not blindly accepting everything being said by The White House.

“There are nascent signs of trouble brewing” in credit delinquencies, Glenmede’s Jason Pride and Michael Reynolds warned in a research note this month, adding:

“An ever-larger share of credit balances have transitioned to early stages of delinquency, consistent with past periods of recession.”

It seems that the economic distress that Powell had cautioned about is now affecting the common people.

In August of last year, Powell stated that controlling inflation would involve higher interest rates, slower growth, and a weaker job market, which would inevitably lead to hardships for households and businesses. He had mentioned that these costs were necessary to bring down inflation, and the failure to do so would result in even greater distress.

With the banking crisis resurfacing (cough FRC cough), the question now is how severe the credit tightening will be and how long it will last before The Federal Reserve is compelled to take a different course of action.

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