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What’s Behind The Rise In Consumer Nonperforming Loans?

By Rupert Hargreaves 

· Note Investing,Note Broker,NPL,CRE,Commercial Debt Sale

here’s a worrying trend developing in the consumer loan market. In the first quarter of 2016, aggregate bank non-performing loans increased for the first time in the post-crisis cycle. Most of these losses were attributed to the energy sector, but there was also an increase in NPL volumes in select consumer loan segments.

This trend was confirmed by NPL guidance from a large consumer finance firm last week according to UBS, which this week published a report on the US consumer loan sector.

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In the report, UBS asks what is driving the increase in consumer NPL and how widespread is the problem? IS this something investors should be worrying about at a time when the Federal Reserve is considering tightening monetary policy?

Nonperforming loans: Identifying trends

To try and understand what’s driving the rise in NPL’s UBS starts with responses from its US Housing Intentions Study. This study looks at household income, debt and expenditure across several income brackets since 2013.

The study finds that among the respondents, roughly two-thirds of lower income and one-third of middle-income consumers cannot cover day-to-day expenses with income. Moreover, quarterly surveys from Q4 2014 to Q1 2016 suggest stable overall debt utilization by type, but rising usage of auto and car loans, which are offset by the declining utilization of bank loans for the middle-income group. Responses from the lower income group over the same period suggest a consistent decline in debt utilization.

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So, middle-income earners debt seems to have remained stable since 2014, while day-to-day finances have deteriorated. It seems as if middle-income earners have been able to maintain this deteriorating credit profit due to an easing of credit standards by non-bank lenders, as UBS explains:

“In terms of bank lending, we believe the OCC’s annual Survey of Credit Underwriting Practices is an objective starting point to evaluate shifts in consumer lending standards. In brief, the results of the OCC’s 2015 survey showed easing in bank lending standards for the third year in a row, driven by the pursuit of loan growth in a highly competitive, low yielding environment.” — UBS only consumer NPLs

It seems as if this combination of easing credit standards coupled with squeezed day-to-day financing is finally starting to show up in NPL figures.

By Rupert Hargreaves

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