US Banks: Is Rising Consumer Debt a Concern?

Banks not selling their consumer loans to investors

According to S&P Global Ratings, US banks (C) (GS) and other lenders are holding onto a higher proportion of consumer loans, including mortgages and student loans, instead of packing them into bonds and selling them to investors. The S&P observed that the percent of consumer debt that banks packaged into bonds to sell to investors is close to the lowest level in a decade. In 2007, ~32% of the total outstanding credit card loans were securitized—compared to 13% of the nearly $1 trillion of outstanding credit loans as of 2Q17.

US Banks: Is Rising Consumer Debt a Concern?

It indicates that banks (MS) (BAC) are comfortable with the current risk level in the segment. In contrast, it could also mean that credit risk is building up in the banking system. However, the S&P noted that the current consumer debt levels are manageable, even if there’s an interest rate hike and another increase in consumer loans.

Insurance industry leads earnings decline

According to FactSet, the financial sector has reported the highest year-over-year earnings decline of all 11 sectors of the S&P 500 (SPX-INDEX) (SPY) at -8.2 % in 3Q17. Out of the five industries in the financial sector, two are reporting or are expected to report lower earnings—led by the Insurance industry (-66%). The insurance industry is also the largest contributor to the earnings decline for the financials. Excluding the insurance industry, the blended earnings for the financial sector would likely rise to 6.9% from -8.2%.