Bank Professionals Pessimistic on Consumer Credit Outlook: FICO

FICO’s latest quarterly survey of bank risk professionals offered a decidedly pessimistic outlook, reversing the growing optimism seen in late 2010 and early 2011. The survey, conducted for FICO by the Professional Risk Managers’ International Association (PRMIA), shows that bankers expect delinquencies on consumer loans to rise, underwriting standards to become stricter, and the housing sector to continue struggling far into the future.

No recovery in sight for beleaguered housing sector

When asked if housing prices nationally would climb back to 2007 levels before the year 2020, 49 percent of respondents said no. By comparison, 21 percent said yes. And the negative sentiment extended beyond property values. Among bankers surveyed, 73 percent believed mortgage defaults would remain elevated for at least five more years. Furthermore, 46 percent of respondents expected mortgage delinquencies to increase over the next six months, and only 15 percent of respondents believed mortgage delinquencies will decline during that period.

“Housing has been an enormous drag on the economy for over three years as U.S. households lost trillions of dollars in equity,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “While the housing sector will almost certainly gain strength during the next nine years, many bankers clearly believe prices will remain depressed for half a generation. This puts the devastation of the housing crash into perspective.”

Consumer credit health seen declining

Bankers expressed concern about consumer credit health beyond mortgages. When asked their opinions about the next six months, a large number of survey respondents indicated that they expect delinquencies to rise on auto loans, credit cards and student loans. Auto lending had been a bright spot in FICO’s previous quarterly surveys, but in the latest survey, 30 percent of respondents indicated that they expect auto delinquencies to rise, while 21 percent expected them to fall. For credit cards, 40 percent expected delinquencies to rise and 23 percent expected them to fall. And for student loans, 48 percent of respondents expected delinquencies to rise and 13 percent expected them to fall.

Small businesses expected to face challenging credit environment

By a margin of 36 percent to 17 percent, survey respondents expected delinquencies on small business loans to increase rather than decrease. And while 57 percent of bankers surveyed expected the amount of credit requested by small businesses to increase over the next six months, only 34 percent expected the amount of credit that is actually extended to small business to increase. This “credit gap” between supply and demand has been persistent over the past six quarters.

“Small businesses have traditionally been providers of much-needed jobs during economic recoveries,” said Jennings. “But the tight credit conditions facing small businesses today make it difficult for them to invest and expand. Rather than something to be counted on, the notion of small-business job creation seems, for the moment at least, aspirational.”

Credit usage expected to rise slowly

A large plurality of survey respondents (50 percent) expected credit card balances to increase over the next six months. The increases are likely to be driven by higher spending among some consumers and smaller monthly payments from others. However, in a sign that bankers aren’t optimistic about the ability of consumers to power the economic recovery, 64 percent of respondents expected credit card usage to remain below pre-recession levels for at least five more years.

A detailed report of FICO’s quarterly survey results is available at http://www.prmia.org/PRMIA-News/Fico-3rdQuarterOct2011FF.pdf. The survey included responses from 188 risk managers at banks throughout the U.S. in August 2011. FICO and PRMIA extend a special thanks to the Columbia Business School’s Center for Decision Sciences for its assistance in analyzing the survey results.

The Professional Risk Managers’ International Association (PRMIA) is a higher standard for risk professionals, with 65 chapters around the world and nearly 80,000 members in nearly 200 countries. A non-profit, member-led association, PRMIA is dedicated to defining and implementing the best practices of risk management through education, including the Professional Risk Manager (PRM) designation and Associate PRM certificate; webinar, online, classroom and in-house training; events; networking; and online resources.

FICO delivers superior predictive analytics solutions that drive smarter decisions. The company’s groundbreaking use of mathematics to predict consumer behavior has transformed entire industries and revolutionized the way risk is managed and products are marketed. FICO’s innovative solutions include the FICO(R) Score — the standard measure of consumer credit risk in the United States — along with industry-leading solutions for managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks, as well as leading insurers, retailers, pharmaceutical companies and government agencies, rely on FICO solutions to accelerate growth, control risk, boost profits and meet regulatory and competitive demands.