Occasionally, I admit when I am wrong.

When COVID hit and lockdowns began last March, many lenders reached out to me for guidance on how to deal with the crisis. Initially, my advice was to shoot first, and ask questions later: halt all discretionary marketing, pull back on credit, and focus on stabilizing operations and enabling work-from-home. In the greatest period of uncertainty of our generation, everyone moved immediately into full-blown crisis mode.

In May, as the dust began to settle, we started having more thoughtful conversations on the outlook for credit, given the backdrop of a global pandemic that showed no signs of abating any time soon. As forbearance programs rolled out and government stimulus payments began to reach consumers, we saw a sharp improvement in credit performance. And yet, I remained ultra-bearish on credit, presuming that the effect of the lockdown and the surge in unemployment would trigger a recession. My advice for lenders was to assume that default rates would quickly return to pre-COVID levels and then continue to rise higher due to the economic impact of shutdowns. I felt the stimulus effect was temporary and lenders should remain very tight on credit policy. The other shoe would drop soon.

But a month of great credit performance became a quarter. And then a quarter became a year. We are still at all-time lows for consumer delinquency as vaccines roll out and markets re-open. At some point, I have to question whether my approach has been too conservative. Should lenders start using a more optimistic decisioning scenario?

How good does credit have to get?

The global experiment

The one thing this global experiment has taught me is just how rational and resilient consumers can be with their finances when given the opportunity. In all the countries I’ve been consulting in, I’ve seen consumers using government stimulus to pay down their debts, especially high interest credit cards.

Remarkably, the consumer balance sheet is stronger than ever before. The Bank of Canada has said Canadians saved about $180 billion in 2020, or roughly $5,800 per person. These same factors of government stimulus and higher savings is what has driven exceptional credit performance for the past year.

A cautious approach

The banks have begun to react to this good news with large releases of loss reserves last month, earlier than some expected. But on the underwriting side, most lenders are still operating under tighter credit criteria, nowhere near back to pre-COVID levels.

This approach has seemed prudent until recently, as we assumed there would be a return to “normal” in terms of consumer credit behaviour. But will there be? Or will we experience a “new normal” for some extended period of time? At some point, I have to believe that the dramatic improvement in the consumer’s balance sheet will have a sustainable, if not permanent, effect on credit performance. Right?

A new normal?

At least some lenders are starting to share this line of thinking. In Capital One’s latest earnings release, this is how Rich Fairbank described it: “Every month that the consumer remains healthy, we're burrowing a longer tunnel underneath the mountain of still high unemployment, and we're reducing the cumulative losses through this downturn rather than just delaying the impacts.”

“Every month that the consumer remains healthy, we're burrowing a longer tunnel underneath the mountain of still high unemployment, and we're reducing the cumulative losses through this downturn rather than just delaying the impacts.” Rich Fairbank, CEO, Capital One Financial

To be clear, I’m by no means advocating for a 180-Degree turn on lending sentiment. Unemployment rate is still at 8.1%, 170 bps higher than pre-pandemic. But I do think there can be a first-mover advantage to relaxing credit in a thoughtful way and re-starting the growth engine; the best quality loans are often booked when supply in the market is low like it is now. At Payson Solutions, we can help you navigate through this seam and allow you to capitalize on the market opportunity.

What are your thoughts?

I’d love to hear some other opinions – please share your thoughts in the Chat! It’s been a long year and I also look forward to seeing old friends in person; hopefully, very soon.

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