us consumer credit risk 1q011
TRANSCRIPT
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A Survey by the
Professional Risk
Managers International
Association
March 2011
US CONSUMER CREDIT RISKTrends and Expectations
FIRST QUARTER 2011
PRMIA thanks our survey spon
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2 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N
ACKNOWLEDGEMENTS
The Professional Risk Managers International
Association (PRMIA) is a higher standard for risk
professionals, with 60 chapters around the world
and more than 75,000 members from 198 countries.
A non-profit, member-led association, PRMIA is
dedicated to defining and implementing the best practices of risk management through
education including the Professional Risk Manager (PRM) designation and Associate
PRM certificate; webinar, online, classroom and in-house training; events; networking;
and online resources. More information can be found at www.PRMIA.org.
FICO (NYSE:FICO) delivers superior predictive analytics
that drive smarter decisions. The companys groundbreaking
use of mathematics to predict consumer behavior has
transformed entire industries and revolutionized the way risk is managed and products
are marketed. FICOs innovative solutions include the FICO Score the standard
measure of consumer credit risk in the United States along with industry-leading
solutions for managing credit accounts, identifying and minimizing the impact of fraud,
and customizing consumer offers with pinpoint accuracy. Most of the worlds top banks,
as well as leading insurers, retailers, pharma businesses and government agencies rely
on FICO solutions to accelerate growth, control risk, boost profits, and meet regulatoryand competitive demands. FICO also helps millions of individuals manage their personal
credit health through www.myFICO.com. FICO: Make every decision count.
PRMIA would like to extend
special appreciation to The
Center for Decision Sciences
at Columbia Business School for their assistance in analyzing the survey responses. The
Center for Decision Sciences brings together scholars from a range of fields who share
an interest in human decision making. The center facilitates research and understanding
on consumer behavior, the implications of decision making on public policy, and the
neurological underpinnings of judgment and decision making. The center is housed
within Columbia Business School, widely acknowledged as being among the worlds
top business schools. To learn more, visit http://decisionsciences.columbia.edu.
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A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S
E X E C U T I VE S U M M A R Y
The present survey finds most risk management professionals to be optimistic
about the next six months. While still concerned about the level of home equity
line and mortgage delinquencies, likely as the result of the slow recovery of the
housing market, risk managers feel more optimistic in regard to delinquencies of other
types of loans and credit. While a rise in interest rates is predicted, a rise in credit
requests and approvals is also forecasted. Looking ahead, nearly half of respondents
do not believe interest rates on 30-year loans will go above 6% in 2011, and most are
unsure if first-party fraud will pose a significant threat over third-party. Throughout all
the survey questions, about 30.0% of the responders predict no change over the next
six months, suggesting a general feeling of certainty emerging from the extreme
volatility of the previous five years.
Key findings, predictions about the next six months:
I Most respondents feel that the level of mortgage and home equity line delinquencieswill rise or stay the same.
I There is no clear consensus on credit card delinquencies, with an equal number ofrespondents predicting an increase, decrease, or no change.
I Most respondents feel that auto loan and small business loan delinquencies will
decrease or stay the same.
I Nearly half (46.7%) of the respondents predict an increase in student loan delinquencies.
I A majority of respondents (53.7%) expect an increase in interest rates.
I Half of respondents (52.6%) predict an increase in the amount of credit or loansrequested by consumers. 49.5% feel that the amount of credit extended to consumerswill rise.
I A large majority (92.7%) of respondents believe the number of existing customerswho request credit line increases will increase or stay the same, with only one third(33.5%) forecasting an increase in new delinquencies.
I A majority (84.2%) believe the amount of credit requested by small businesses willincrease, with 60.1% expecting the amount of credit extended to increase in turn.
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4 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N
Delinquency Predictions are Mixed
I In general, most (81.8%) believe that the level of mortgage delinquencies will stay about thesame or increase in the next six months, with a small number (18.1%), believing they willdecrease. Over the past year, more respondents have begun to move toward predicting adecrease, with the number growing from 10% in April 2010 to 15% in November 2010.
I Respondents felt similarly about home equity line delinquencies, with the same upward trend ofrespondents hopeful for a decrease. However, in the past six months this group has plateauedat roughly 20% of those surveyed.
I Turning to credit card delinquencies over the next six months, roughly one third (28.3%) ofrespondents feel that they will increase, one third (36.3%) predict a decrease, and one third(35.4%) feel they will stay about the same. However, this appears quite different from April2010, when a majority (56.2%) of respondents expected an increase. At that time, less than10% predicted a decrease.
I When asked about the level of auto loan delinquencies, most felt the level would decrease orstay the same (76.4%). As with credit card delinquencies, this number is higher than tenmonths earlier, when only a little over half of respondents (56.2%) answered similarly.
I When asked about small business loan delinquencies in the next six months, respondents againwere equally divided between the prediction of an increase (30.6%), a decrease (37.2%), and nochange (32.5%). However, as observed with credit card delinquencies, numbers from ten monthsago were quite different, with more than half (59.2%) expecting an increase.
I Finally, when asked to predict student loan delinquencies, only roughly 15.4% of respondentspredicted a decrease, with 46.7% predicting an increase, and 38.0% feeling the rate wouldremain unchanged. This looks fairly similar to previous surveys.
I Overall, risk managers appear hopeful for the next six months, expecting decreases indelinquencies on short-term loans and revolving credit, with potential increases in delinquencieson long-term loans. However, it should be noted that across the six categories of loans, onaverage one third (37.3%) of respondents predicted no change.
KEY FINDINGS AND ANALYSIS
SEE GRAPH ON NEXT PAGE.
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A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S
0% 20% 30% 40%
The level of residential mortgage
delinquencies (of 90 days or more) to
The level of home equity line delinquencies to
The level of credit card delinquencies to
The level of auto loan delinquencies to
The level of small business loan delinquencies to
The level of student loan delinquencies to
50%
Increase signicantly
Increase somewhat
Stay about the same
Decrease somewhat
Decrease signicantly
10%
FIGURE 1
Looking at the industry as a whole, over the next six months, do you expect: (check all that apply)
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6 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N
Forecasting Rate Increases Along With More Borrowing BehaviorI Turning now to interest rates, half of the respondents felt rates would increase somewhat
(50.0%) with a small number (5.2%) expecting a large increase. Only 2.4% of individualssurveyed expected a small decrease. Interestingly, in November of 2010, 14.8% expected adecrease, while only 37.0% expected a small increase.
I As far as consumers average credit card balances, many respondents (34.8%) feel that it willstay relatively unchanged over the next six months, while slightly more (41.1%) expect anincrease. Numbers remain relatively unchanged over the past year.
I In regard to applications for loans and credit, slightly less than half (47.1%) expect to see more
applications in the next six months, with 34.8% of respondents expecting the rate to remainabout the same. This is higher than four months earlier, when 38.3% of respondents expectedhigher volume.
I In terms of the amount of credit or loans requested by consumers, half (52.6%) expect this toincrease over the next six months. Over the past year, an increasing number of respondentshave felt this way, with the current number up from 35% six months earlier.
I However, when asked about the approval rates of these increased applications, reactions weremixed. Less than half (45.2%) felt these would stay the same as previous approval rates. 24.3%expected a decrease, while 30.5% expected an increase. Compared to August of last year, when35.2% of respondents expected a decrease, sentiment is generally more positive.
I The amount of credit extended is also uncertain, with slightly less than half (49.5%) feeling theamount will increase, about one third (30.0%) predicting the same average amount, and only20.4% predicting a decrease. Again, compared to August, a more positive attitude is observed.At that time, only 30% predicted an increase.
I Finally, slightly less than half of respondents (44.9%) look for the approval criteria for commoncredit and loan products to stay about the same, while just over one third (37.1%)expect themto become more stringent. This appears to have changed between August and November oflast year. Prior to November, many (41.1%) predicted an increase in the stringency of approvalcriteria, while only 35.6% expected it to remain the same. Throughout this time, a low percent-age (13.6%) of the respondents have indicated that they expect the criteria to loosen.
SEE GRAPH ON NEXT PAGE.
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A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S
0% 20% 30% 40%
Interest rates for consumer credit to
The approval criteria for common
credit and loan products to
The average balance on credit card accounts to
The volume of credit/loan applications to
The aggregate amount of
credit requested by consumers to
The approval of credit/loan applications to
The amount of consumercredit extended by lenders to
50%
Increase significantly
Increase somewhat
Stay about the same
Decrease somewhat
Decrease significantly
10%
Looking at the industry as a whole, over the next six months, do you expect: (check all that apply)
FIGURE 2
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8 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N
Risk Management a Clear Priority
I Most risk managers surveyed (61.4%) expect that the priority placed on risk management at their organi-
zations will increase over the next budgeting cycle, and 34.8% believe the priority will stay the same.
0% 20% 30% 40%
The number of existing customers
who request credit-line increases to
The total number of delinquencies (of 90
days or more) on consumer lending products to
The number of new delinquencies (of 30
days or more) on consumer lending products to
50%
Increase significantly
Increase somewhat
Remain the same
Decrease somewhat
Decrease significantly
10%
0%
50%
40%
30%
20%
Increase significantly
Increase somewhat
Stay about the same
Decrease somewhat
Decrease significantly
10%
The priority placed on risk management at your institution to FIGURE 3
FIGURE 4
I This seems especially prescient given that 92.7% of respondents believe the number of existingcustomers who request credit line increases will increase or stay the same. In contrast, a smallernumber of respondents believe credit-line increase requests will decrease.
I While one third (33.5%) of the respondents forecast an increase in new delinquencies on consumerlending products, a similar number (32.6%) expect a decrease. Over the past year, the number ofrespondents expecting a decrease has grown from 17.5% to nearly one third.
I In respect of total delinquencies, predictions remain mixed with roughly an equal number expectingthe number to increase, decrease and stay the same.
During the next budgeting cycle, do you expect:
Looking at the industry as a whole, over the next six months, do you expect:
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A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S
0% 20% 30% 40%
The aggregate amount of credit
requested by small businesses to
The approval rate of credit/loan
applications from small businesses to
The amount of credit extended
to small business by lenders to
50% 60% 70%
Increase significantly
Increase somewhat
Remain the same
Decrease somewhat
Decrease significantly
10% 80%
FIGURE 5
Looking at the industry as a whole, over the next six months, do you expect:
Growing Small Businesses
I Turning now to small businesses in particular, an overwhelming majority of respondents (84.2%)
believe the amount of credit requested by small businesses will increase.I Responding to this increase, slightly over half (60.1%) of the respondents believe the amount of
credit extended to small businesses will increase.
I Similarly, slightly less than half of respondents (49.3%) look for approval rates of applications bysmall businesses to increase; with another third (36.0%) predicting it will remain the same.
I Most respondents appear very positive in regard to small businesses in general, looking for themto request and receive more credit, without having an increased rate of delinquencies.
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1 0 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N
More respondents have begun to predict decreases in the level of mortgage and home equity line delinquencies.
Historical Analysis
Most risk managers surveyed (61.4%) expect that the priority placed on risk management at their organizations
will increase over the next budgeting cycle, and 34.8% believe the priority will stay the same.
0%
10%
8%
6%
4%
Mortgage delinquencies percent of
respondents expecting a decline
2%
10%
13.4% 15.1%
18.1%
Q2 2010 Q3 2010 Q4 2010 Q1 2011
20%
18%
16%
14%
12%
0%
10%
8%
6%
4%
Home equity delinquencies percent of
respondents expecting a decline
2%
10%
17.5%16.4%
20.9%
Q2 2010 Q3 2010 Q4 2010 Q1 2011
20%
18%
16%
14%
12%
Similarly, fewer respondents predict an increase in credit card, auto loan, and small business loan delinquencies.
0%
25%
20%
15%
10%
Credit card delinquencies percent of
respondents expecting a decline
5%
9.1%
23.4%20.7%
36.3%
Q2 2010 Q3 2010 Q4 2010 Q1 2011
40%
35%
30%
0%
25%
20%
15%
10%
Auto loan delinquencies percent of
respondents expecting a decline
5%
15.4%
24%22.4%
37.2%
Q2 2010 Q3 2010 Q4 2010 Q1 2011
40%
35%
30%
FIGURE 6FIGURE 7
FIGURE 8 FIGURE 9
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A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S
0%
10%
8%
6%
4%
Student loan delinquencies percent of
respondents expecting a decline
2%
9.2%
7.6%9.1%
15.4%
Q2 2010 Q3 2010 Q4 2010 Q1 2011
20%
18%
16%
14%
12%
0%
25%
20%
15%
10%
Total number of delinquencies percent of
respondents expecting a decline
5%
17.5%
20.8%
29.3%
Q2 2010 Q3 2010 Q4 2010 Q1 2011
40%
35%
30%
0%
25%
20%
15%
10%
Small business loan delinquencies percent of
respondents expecting a decline
5%
11.5%
18.5%20.6%
36.2%
Q2 2010 Q3 2010 Q4 2010 Q1 2011
40%
35%
30%
I More respondents believe a rate increasewill occur; however, predictions regardingconsumers average credit card balances
remain unchanged.I Compared to previous surveys, more
respondents predict that loan and creditapplications, amounts, and approvals willincrease.
FIGURE 10
FIGURE 11
FIGURE 12
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1 2 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N
0% 20% 30% 40%
The number of pre-approved
credit card solicitations sent to U.S.
consumers in 2011 will exceed 2010
levels by at least 25%
Interest rates on 30-year,fixed-rate
mortgages in the U.S.will go above
6% in 2011, even for buyers with
outstanding credit
Basel III regulations will have a
material,negative effect on the
profitability of U.S.banks
In 2011, the cost of first-party
fraud will exceed the cost ofthird-party fraud for U.S. banks
The combined effect of the CARD Act
and the Dodd-Frank Act will restrict
the availability of credit for
high-risk consumers
50%10% 60%
Agree strongly
Agree
Undecided
Disagree
Disagree strongly
Looking Ahead
I On the number of pre-approved credit card solicitations sent to U.S. consumers, respondentswere sharply divided, with slightly over one third (44.0%) believing that these will increase in2011 when compared to 2010 levels, and 39.5% disagreeing.
I Further, many (52.2%) believe that interest rates on 30-year, fixed-rate mortgages in the U.S.will not go above 6% in 2011. While one third (36.3%) of respondents do not know if Basel IIIregulations will have a negative effect on the profitability of U.S. banks, a larger number (45.1%)believe they will.
I Another area of uncertainty involves the cost of first-party fraud in comparison to third-partyfraud for U.S. banks. Half of respondents (56.7%) are undecided if the cost of first-party fraudwill exceed the cost of third-party fraud in 2011. A seemingly equal number (23.9% vs. 19.4%)believe it will or wont, respectively.
I Finally, an overwhelming majority of respondents (75.5%) believe that the combined effectof the CARD Act and the Dodd-Frank Act will restrict the availability of credit for high-riskconsumers, with less than 10% (9.9%) believing it will not have such an effect.
Choose the answer that best describes your sentiment:
FIGURE 13
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A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S
Your job (select most appropriate)
Chief Risk Officer
Functional leader
Portfolio/product management
Business/risk analystOther
17.6%
26%
16.7%
9.3%
30.4%
0%
50%
40%
30%
20%
10%
49.7%
46.4%
31.1%
10.6%
54.3%
11.3%
60%
Card portfolio
Mortgage portfolio
Auto loan portfolio
Direct deposit accounts
Lines of credit
Student loans
Large percentages identified areas of responsibility in card portfolio (49.7%),
mortgage portfolio (46.4%), and lines of credit (54.3%).
216 respondents completed the survey, with 30.4% of them identifying as a Business
or Risk analyst, and 16.7% identifying as the Chief Risk Officer of their company.
FIGURE 15
FIGURE 14
RESPONDENT PROFILE
What is your area of responsibility (check all that apply)?
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1 4 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N
What is the businessorientation of your institution(select the most appropriate)?
What is the size of yourinstitution (by total assets)?
Full Service Bank
Credit Union
Mortgage lender
Wealth management, investments, retirement services
Discount and/or self-serve financial services
Credit Card Monoline
50%
16.9%
9%
6.7%
9.6%
7.9%
FIGURE 16Up to $5 billion
$5 $10 billion
$10 $20 billion
$20 $40 billion
$40 + billion
7.1%
28.3%
43.9%
7.1%
13.6%
FIGURE 17
A quarter (28.3%) work at companies
with more than $40 billion dollars in
assets, with a bit less than half (43.9%)working at a smaller firm (up to $5
billion in assets).
Many (50.0%) work at full service banks, andmost (65.0%) work for a company with at
least National reach.
Global
National
Regional
Local
Internet-based1%
22.3%
32%
12.7%
32%
What is thegeographic reachof your institution?
FIGURE 18
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