FICO, a provider of analytics and decision management technology, reports that a new survey found strong evidence of a credit gap for consumers as lenders expect credit availability to fall short of consumer demand through the end of 2010.
The quarterly survey of bank risk professionals, conducted for FICO by the Professional Risk Managers' International Association (PRMIA), found that 73% of 235 respondents expect the volume of credit applications to increase or remain steady over the next six months.
However, 46% of respondents expect approval criteria for credit to get stricter and only 14% expect criteria to be loosened. Furthermore, 38% of bankers surveyed expect the approval rate for credit applications to decline, while only a quarter of those surveyed expect a higher approval rate.
"Although the outlook isn't as pessimistic as it was earlier this year, it's clear we still haven't reached a point of equilibrium between supply and demand for consumer credit," says Dr. Andrew Jennings, chief research officer at FICO and head of FICO Labs, which works with PRMIA on the quarterly survey. "Banks remain concerned about loss prevention. Government data released in August indicates personal bankruptcies are at their highest levels in five years, and other recent data confirms the ongoing challenges in the employment and housing sectors. This type of economic environment makes it difficult for lenders to open up the flow of credit without taking on significant risk."
Evidence of a credit gap is consistent with other research by FICO Labs, which recently examined credit data compiled in the 12 months ending in April 2010. During those 12 months, the number of new credit cards opened by U.S. consumers dropped by 17.7% compared to the previous 12 months.
By contrast, the number of inquiries for new credit fell by only three percent during that time, indicating that consumers were unable to access all the credit they were seeking. Furthermore, the total amount of credit available on all U.S. consumer credit cards fell by 12.2% during the same 12-month period.
When asked about expected delinquency rates for several types of credit products, many bankers said they expected delinquencies to increase. This includes home mortgages (53% of respondents expected a rise in delinquencies while only 14% expected a decrease), credit cards (42% expected an increase), small business loans (47% expected an increase) and student loans (49% expected an increase).
In a somewhat unexpected survey result, according to FICO, bank risk officers who are responsible for auto loans and credit cards had a particularly negative outlook about their sectors. Among bankers who manage auto loans, 96% expect delinquencies on auto loans to increase or remain the same. Less than 4% expect delinquencies to drop. And among bankers who manage credit cards, nearly 85% expect delinquencies on credit cards to increase or remain the same, while approximately 15% expect delinquencies to drop.
Respondents also were asked about their overall expectations for new delinquencies (i.e., accounts that become 30-days late) and chargeoffs (i.e., older delinquencies that are written off). Respondents felt both categories of delinquencies were going to rise, and the sentiment was similar in strength for both categories, which suggests the pipeline of delinquencies isn't going to shrink in the near future.
While the results of this survey indicate pessimism among bank risk professionals, the results were less negative than the results of the same survey taken in the second quarter of 2010.
For example, while 53% of all respondents in the third quarter expected mortgage delinquencies to rise, the figure was 60% in the second quarter. Likewise, the percentage of all respondents expecting an increase in credit card delinquencies fell from 59% to 42%. The percentage of all respondents expecting an increase in delinquencies on auto loans fell from 41% to 30%.
In summarizing the survey results, PRMIA member Professor Russell Walker of the Zell Center for Risk Research at Northwestern University's Kellogg School of Management said, "With banks still seeing a rather negative outlook, we expect a lot of unmet demand in consumer credit for quite some time. However, as economic conditions in the U.S. continue to improve, this unmet demand provides banks with a potentially profitable opportunity that will require a strong risk management approach to offering credit."