In its release of its 3rd quarter earnings, Discover Financial Services recorded a profit of over $260 million. Along with other members of the consumer banking industry such as American Express Co. and Capital One Financial Corp., Discover attributes its earnings to better credit trends, more consumer spending, and more availability of reserves.
An important indicator for the future of the consumer credit industry is the delinquency rate. A falling delinquency rate means that more card holders are paying off their credit card debts, and fewer are late in submitting their payments. Lower delinquency rates allow financial services companies such as Discover to lower its reserve funds because it feels more confident that card holders will pay back their debt. Fewer reserve funds are a good indicator of industry health. Hopefully, the falling delinquency rate is a sign of future industry health.
Declining delinquency rates also show an important positive trend in the consumer credit market. Since the height of the financial crisis, financial services companies have clamped down on the amount of credit available to consumers. Lower delinquency rates are a clear indicator that the clamp down on credit has effectively reduced the number of risky consumer borrowers. This allows companies such as Discover to generate more profits and it is a good sign for a recovering financial services industry.
The increase in consumer spending on credit cards also is a positive sign for the consumer financial services industry. Consumers have responded to a rebounding economy by increasing their spending which contributes to an increase in profits. While the positive 3rd quarter earnings are clearly a step in the right direction for the consumer financial services industry, more positive data is required to make a firm judgment about the overall trends of the industry.
-Justin Schaffer
According to the Dow Jones US Consumer Finance Index, the consumer banking industry has continuously suffered slow increases followed by rapid declines throughout the past two years. Given that Discover is reporting heightened consumer spending and a decrease in delinquency rates, this could suggest, as you said, that the industry is witnessing a rebound. If this is the case, how long will the industry observe such positive trends before it sees another downward spiral? Can the consumer banking industry break the trend of slow ups and quick falls? If so, how?
ReplyDeleteI feel like this is just part of the economic cycle. we reached our lowest point, and from this point on we have no place to go but up. sure, we have up and down times but generally we aren't getting any lower then we have previously been. This is a really good sign, going to keep a close eye on where this goes
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