By the Numbers
Bank view of consumer credit sees student loan, auto pressure
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Banks are taking a benign view of their own consumer loans despite concerns kicked up by the bankruptcy of subprime auto lender Tricolor Holdings and other rising consumer delinquencies. Student loans and autos held by banks look a little weaker than they have for the last five years with credit cards and mortgages still strong. The latest bank outlook reflects broader snapshots of consumer health, suggesting consumer credit is running in the same direction both inside and outside the bank market.
The Federal Reserve every quarter asks large or highly complex banks to categorize their consumer loans by 2-year probability of default. The long horizon encourages banks to weigh not just immediate performance but also a longer view of borrowers and their circumstances. The answers provide a good benchmark for banks’ evolving view of credit.
The series of weighted average 2-year default rates on consumer loans going back to 2013 shows cards continue to decline in the latest report with auto and student loans up slightly (Exhibit 1). The amount of change is small. Cards are down 35 bp in the last year through June, autos up 12 bp and student loans up 39 bp.
Exhibit 1: Banks’ default expectations for cards fall, autos and student loans rise
Note: methods for calculating these expectations described in an appendix to this note.
Source: Federal Reserve Enhanced Financial Accounts, Santander US Capital Markets
In bank mortgages, expectations of default continue to drift lower. Weighted average 2-year defaults in first liens are down 5 bp in the last year through June, nontraditional mortgages with flexible repayment terms and other features are down 7 bp and home equity lines of credit down 3 bp (Exhibit 2).
Exhibit 2: Banks default expectations for mortgages fall
Note: methods for calculating these expectations described in an appendix to this note.
Source: Federal Reserve Enhanced Financial Accounts, Santander US Capital Markets
The trends broadly parallel results from credit bureaus that report loans made both inside and outside the banking system. Instead of reporting expected defaults, the Fed reports current delinquencies using a national representative sample of individual and household credit records from Equifax. Those numbers show credit card delinquencies down 1 bp, mortgage delinquencies down 4 bp, auto delinquencies up 56 bp and student loan delinquencies up 951 bp (Exhibit 3). The direction for each type of loan is the same in the credit bureau numbers as in the survey of bank expectations, although the percentage change in the delinquencies are obviously greater.
Exhibit 3: Delinquency for cards and mortgages fall, autos and student loans rise
Source: Bloomberg, Federal Reserve, Santander US Capital Markets
The delinquency series is clearly more volatile than the survey, but that almost certainly reflects bank efforts to partly look through current conditions and consider outcomes over two years.
Despite differences between the bank survey and the delinquency series, both suggest student and auto loans are the biggest sources of stress on consumer balance sheets. Both types of loans have become more leveraged in recent years. Student loans became leveraged by a moratorium on payment that started in 2020 and only completely ended in October 2024. And auto loans became leveraged by a decline in auto prices starting in 2022 and by a steady extension of auto loan maturities, leaving the loans secured by highly depreciated vehicles toward the end of their term. These look like continuing sources of stress.
Both series also agree that mortgage credit looks strong. Mortgage risk has deleveraged as home prices have climbed quickly since 2020. Although home prices have decelerated this year, accumulated home equity should keep most mortgage credit strong.
Both series also agree that credit card performance looks at least stable. But that may only reflect a resilient labor market.
For investors, risk premiums on the associated debt should reflect the strength or weakness in the fundamental credit. Quality consumer credit looks more likely to be found in mortgages and cards, speculative credit in student loans and auto paper.
A note on methods to calculate weighted average default rates from bank survey responses:
The banks surveyed by the Fed put their loans into 12 categories from loans with less than 1% probability of default in the next two years to loans with more than 30%. One summary of the results is to take each category and weight it by the amount of loan principle assigned. The most recent credit card numbers from the second quarter, for example, show an expected 2-year default rate of 5.41% (Exhibit 4). These numbers become valuable across loans and over time.
Exhibit 4: Calculation of latest weighted 2-year default rate in credit cards
Source: Federal Reserve Enhanced Financial Accounts, Santander US Capital Markets
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