October 10, 2020 / VOLUME NO. 126
The Data Lie

For most lenders, the unemployment rate is probably one of the biggest predictor of financial stress and potential losses.

At the end of the second quarter, the unemployment rate stood at 11.2% and gross domestic product sank at an annualized rate of 31.7%.

OneMain Financial, a nonbank lender that services below-prime borrowers, reported a 30- to 89-day delinquency rate of 1.63% in the second quarter. Not only was this 52 basis points lower than it was a year prior — it was OneMain’s lowest quarterly delinquency rate since its transformative 2015 merger.

The driver behind this performance was government stimulus. Inflated unemployment insurance payments under the CARES Act probably helped OneMain’s consumer borrowers stay current on loans and kept a lid on defaults and delinquencies.

It also created a data point that is so divorced from the second-quarter unemployment rate that it has little predictive value.

That incongruity could continue into the third quarter. Bolstered unemployment payments continued one month into the quarter before expiring. Economic activity picked up as states reopened and school started. The unemployment rate fell to 7.9% at the end of September; the GDPNow forecasting model from the Federal Reserve Bank of Atlanta estimates this week that third-quarter GDP could grow 35.3% on an annualized basis. Already, a number of banks have filed inter-quarter disclosures indicating dramatic drops in second-round loan deferrals — a small bright spot that serves as a proxy for the state of credit risk.

The coronavirus pandemic has now worn on for eight months, infecting 7.6 million people in the United States and killing more than 210,000 so far. But its economic impact is encapsulated in a mere three quarters of data. Some of the data is remarkable — not for how bad it is, but by how bad it isn’t.

What reality will third-quarter earnings reflect?

Kiah Lau Haslett, managing editor of Bank Director
/ ideas, insights and perspectives on BankDirector.com
The third quarter could see second-round deferrals substantially fall at the same time that nonaccruals and criticized assets begin increasing.

“We’re in a much better spot now, versus where we were when this thing first hit. But we tell our clients to continue proactively monitoring risk … .” — Corey Goldblum, Deloitte 

Kiah Lau Haslett, managing editor for Bank Director
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