The Economy's Impact on Creditworthy Borrowers

Ed Kountz | July 29, 2008, 08:45 AM

Retail analyst Patti Freeman Evans and I have both blogged on the impact of the credit crunch on retail (both overall and the online variety, which as regular readers know has held up fairly well in comparison to retail overall in recent months). Most recently, HERE

But the slowing economy keeps coming up, and given recent connections to creditworthy borrowers is worth a few words. AmEx CEO Ken Chenault’s statements on the economy’s impact were noted in this space on June 26th 2008. Earlier this month, he addressed the impact at more length, noting that the “much weaker” business environment was impacting AmEx’s business even among high net worth / high credit score consumers.

"Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations," Chenault said. "The scope of the economic fallout was evident even among our longer term, superprime cardmembers."

He has also noted that California and Florida cardholders, whose fortunes were tied most directly to the severity of the housing collapse in those states, were leading in terms of delinquencies.

``We are seeing very affluent people who have had historically very, very strong spending history with us cutting back,'' Chenault said.

JP Morgan Chase CEO Jamie Dimon has noted similar trends--most recently in the transcript of the bank’s mid-July conf call:

“Our expectation is for the economic environment to continue to be weak–and to likely get weaker–and for the capital markets to remain under stress.”

“We remain conscious that since substantial risk still remains on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.”

Like Chenault, Dimon also noted that his bank’s more creditworthy customers are failing to pay (in this case, mortgages) in greater numbers—between Q1 and Q2 2008, the bank’s chargeoff rate for prime mortgages rose from .48% to .91%

With Merrill Lynch today announcing a write-down of $5.7 billion (offset, the broker claims, by efforts to raise $8.5 billion in new capital), it’s clear that the optimism evinced in many circles of the financial services space about the brevity of the credit crunch earlier this year was premature. Yes, online retail remains a bright spot…and this will benefit the leading retailers and those with heavy payments preference/ usage in the e-retail space. But the behavior of the nation's most creditworthy borrowers, and the impact of this behavior on leading FIs, should temper that optimism with the realization that retaining confidence among the creditworthy will be an important pillar in maintaining that shine thru the rest of 2008.