Consumer Spending & Borrowing Informs Recovery Outlook

AlphaSense Staff

The OECD released a statement this week warning that COVID-19 has triggered the most severe recession in nearly a century. As analysts consider the shape of the recovery, they are at the mercy of exogenous factors like tension between China and the US, a potential second wave of COVID-19, and the development of a vaccine.

Many investors are looking to lead financiers for guidance on consumer spending and borrowing across geographies as a short-term solution to tracking economic health. We’ve compiled a snapshot of executive commentary from industry leaders like Visa, CitiGroup, Mastercard, and Bank of America to help you stay informed.

Takeaways:

  • Consumer spending hit a low in mid-April and has been improving into May although it’s still down year-over-year. There’s a great deal of choppiness and significant declines in travel, dining, and entertainment.
  • Borrowing overall is down, but mortgage is strong. This is likely because interest rates are low currently - there is a demand to borrow as well as refinance.
  • Debit is out-performing credit. People are being conservative and spending what they have. Additionally, most government stimulus funds were deposited into checking accounts.
  • Travel has not ticked-up significantly and Financial Services companies are being impacted by a decrease in cross-border spend and FX revenue.
  • As countries open up, consumer spend increases significantly. For example, Visa saw growth improve by 60 percentage points when New Zealand opened up.

AlphaSense can track emerging trends in real-time by industry, watchlist, and across the market. We expect this to be an interesting theme to follow as countries plan to reopen. Start your free trial of AlphaSense now or login to your account.

Visa Inc - RBC Financial Technology Conference (6/11)

Question – Daniel Rock Perlin: So at a high level, I thought we would start off, the economic environment remains very fluid. Visa, in many ways, represents kind of the pulse of consumption around the world. And so I was hoping you could give us kind of an update on what you're seeing and the insight of current trends that you've been releasing maybe even through May and just kind of frame that for the investment community, if you could?

Answer – Ryan M. McInerney: Sure. I'd be happy to. We just actually issued an 8-K last week so it's very timely. I'll go through the data that we're seeing around the world, and I'll try to do it in a fair bit of specificity just to try to help your audience.

If you start in the U.S., overall spending was still declining in the month of May. If you look at the month of May, it had declined 5% overall, but May was 13 percentage points better than April. So spending has steadily improved from not just April to May but actually week-over-week since really mid-April we've seen improvements in spending.

Debit continues to pretty significantly outperform credit. Debit actually had positive year-over-year growth since late April. And it grew 12% in the month of May. So debit was positive 12% growth in the month of May. Credit improved in May by 9 percentage points, but it was still a negative 21% year-over-year growth in the month of May. And the fact that debit is outperforming credit is not surprising. People tend to want to use the money they have in times like this versus money that they might be borrowing. Plus, we've seen the spend mix shift away from more discretionary items where credit is often used or preferred by consumers. And then, you add to the fact that most of the government stimulus funds were deposited into checking accounts, where people use their debit card to spend those money. So debit continues to outperform credit by a fair bit and not totally surprising.

And then if you looked at card-not-present spending. And the way that we look at card-not-present spending in the U.S. is card-not-present spending excluding travel. Growth remained at elevated levels in May. We saw a positive 30% year-over-year from late April onwards while we've seen kind of continued e-commerce adoption. Card-present spending was down 50% year-over-year in April and it exited May declining in the mid-20s. So we're really starting to see as states in the U.S. start to reopen more people are going out, they're using their Visa cards, and we've seen a reasonably large improvement in card-present spending as well.

And then if you look at the industry segments, kind of merchant segments still sticking in the U.S. in May. You have a few segments that have outperformed really throughout the whole crisis. Grocery and drugstores continue to perform well. As an example, we've seen big adoption in online grocery and drugstore spending. And then you've got a few segments that, I think, most people would expect have been hit really hard and they've been continued to hit really hard. Restaurant spending is down significantly and remains down in May. Quick-service restaurants are performing better than traditional sit-down restaurants. But overall as a segment, it's been hit really hard.

And then if you go outside the U.S., it's interesting. Europe, Canada, Australia, Japan have performed very similar to the U.S. So very similar to the trends that I just described. There's a number of markets though that still have very heavy restrictions in place but opening up much more slowly, countries like India and Singapore, so their spending levels remain much lower.

And then we've really been closely tracking some of the countries around the world that have really started to open up. You got markets like New Zealand and Denmark and Chile. New Zealand is an interesting one. I mean, New Zealand is getting close to back to normal as it relates to domestic spending. The borders are pretty much closed. And you look at the change in spending that happened when they opened up, it was dramatic. We saw growth improve by 60, 6-0 percentage points when New Zealand opened up. And the spending levels had remained elevated through kind of the back half of May. So that gives us some indication of what can happen in at least these countries when things really start to open up.

Citigroup Inc - Morgan Stanley Virtual US Financials Conference (6/10)

Answer – Betsy Lynn Graseck: No. That's great. While we're on the topic of consumer and card, which you raised from an operational perspective, but it would be good to understand some of the client updates that you're getting some window on here. And that -- let's kick off with the U.S. consumer. Your Citi-branded card and your retail services businesses give you a great window on what's going on with the U.S. consumer, what they're thinking, how they're spending. Maybe you can give us an update on what you're seeing now versus mid-April and then talk a little bit about how sustainable you think that could be and how you're preparing for the next couple of quarters here.

Answer – Mark A.L. Mason: Yes. Sure. Look, I mean, we've obviously been looking at spend levels. We've been talking about purchase sale volumes coming out of the first quarter. And what I'd say is a spend on credit cards has started picking up in certain categories, certainly relative to the depressed levels that we saw through the middle of April, but they're still significantly lower versus a year ago. In the U.S. cards business, the overall spend started to pick up with May purchase sales down by roughly 20% year-over-year. So still down year-over-year, but better than the mid-30s decline that we were seeing in the middle of April. And you've heard us speak about the idea that there's a great deal of choppiness and significant declines in travel and dining and entertainment which were now roughly 75% in May. And while the essentials that people continue to obviously need and spend on was tracking above last year's levels. And so there's improvement but still down year-over-year. And I think a lot of how this -- how sustainable it is or how this continues to trend is going to depend on the pace and success of the reopenings, which we're starting to see in phased levels and varying degrees across the U.S. But how customers behave as those restrictions ease and how quickly businesses are able to ramp up, frankly, to meet what would then be new demand will be important factors in determining that sustainability, right? And we're watching it carefully to see how our clients who are impacted by the pandemic are able to get back to work and to a more certain future. So there are a fair amount of kind of unknowns that still need to play out as we think about that.

I mean, in our -- if I think about the impact that customers have had and now trying to resume some sense of normalcy in our U.S. consumer business, in that business, we provided assistance and relief to over 1.5 million consumers, and that represents somewhere between 4% and 5% of our balances across the cards and mortgage portfolio, right? That includes payment deferrals and late fee waivers and moratoriums on foreclosures and evictions. I think the hopeful signs that we're seeing -- the hopeful sign that we see is that many of those same customers have continued to make their regular payments despite having that relief. And that suggests that the government's aid has been effective in helping those that have been hit by the crisis. And we've had a similar practice internationally where we've provided similar programs in line with those local regulatory guidelines. And so we're now kind of preparing to help our customers as they roll off of those programs and to make sure that we can assist them as appropriate. But lots of moving pieces still, right?

Capital One Financial Corp - Morgan Stanley Virtual US Financials Conference (6/10)

Answer – Betsy Lynn Graseck: Okay. I guess the other question I have here on the consumer side is how are you seeing spend? Obviously, you've got a big card business and platform. Maybe give us some color on what you're seeing there, different types of spend as well as geographies open versus closed?

Answer – Terrance R. Dolan: Yes. And maybe kind of playing off of spend a little bit in terms of loan balances or maybe what we're seeing on the consumer side. Clearly, the credit card balances are down a bit, and that's tied to the fact that the consumer spend is lower. But we're also seeing, on the auto side of the equation, some strengthening occurring here now in May as some of the markets have been opening up. Coming back to your question with respect to spend patterns. Again, maybe it's helpful, I'll talk about our payments business and kind of the 3 components. And as a reminder, merchant represents about 7% of our overall revenues. Credit card and debit card revenue represents about 6% from a fee-based perspective. And then CPS represents about 3% of our revenues. At the end of April -- or excuse me, at the end of March, merchant was actually down about 50% to 60%. And now at the end of May and June, that's more like 30%. So it's actually continually and steadily gotten better during the May-June, May and early June sort of time frame.

In terms of credit card spend, that was down at the end of March by about 34%. And today, it's recovered to being down about 16%, so again, steady, continuous improvement. In terms of debit card spend, it was actually down about 16% at the end of March. And it's up at this particular point in time, about 5%. So we've seen debit card spend being fairly robust, coming back.

The last area I would just talk about is in the commercial payment space. At the end of March, that was down kind of in that 30% range. In the first week in June, it's down about 27%. So that hasn't recovered quite as fast. And we think it's companies continuing to manage their discretionary spend. And if consumer spend gets stronger, the corporate spend will start to get stronger. So we're actually feeling better today than we were certainly 90 days -- or 60 days ago.

US Bancorp - Morgan Stanley Virtual US Financials Conference (6/10)

Question – Betsy Lynn Graseck: Okay. Maybe we can switch gears and talk a little bit about what you're hearing and seeing from your customers. What are your borrowing or payments customers asking for? Let's start with just on the commercial side, your corporate clients. There is some at-risk industries that you outlined in the 1Q earnings release. And how are you working with these institutions?

Answer – Terrance R. Dolan: Yes. So Betsy, obviously, when you think about this particular situation, there are certain industries that are being more affected than others. And I would say, in general, small businesses are being more impacted or struggling more than some of the larger companies, at least that's in terms of what we're seeing today. When you think about the at-risk, some of those were struggling before, to some extent, in terms of the industry, simply because of structural changes that were occurring and they were being impacted by the transition to digital, et cetera. When you think about the energy or the retail sectors, those were already being impacted. And I think that the health care crisis has accelerated some of those issues that they're facing. And then you have other industries where you think about the entertainment or strong lodging, et cetera, those are clearly impacted. We're continuing to work with them. About 5% of customers overall in the corporate side of the equation have had some form of forbearance. That is more heavily weighted to small businesses. So from a small business perspective, about 11% of customers have asked for some form of forbearance, and we'll have to kind of see how that ends up playing out.

If you think about Commercial Real Estate, Commercial Real Estate is more stressed in areas where -- or industries like lodging or retail. And the impact of the stimulus program, the duration of the health care crisis, all those things are going to kind of come into play with respect to the customer base. What I would say is that when you think about our portfolio, whether it's -- let's take Commercial Real Estate as an example. For the last 2 years or so, we have actually seen fairly flat growth in Commercial Real Estate, and that's because from an underwriting perspective, we have continued to be very focused and very strong knowing that at some particular point in time, a recession was going to come. Now in addition, if you end up looking at the loans to value that we have in our portfolio, it's about 60%. So we feel like we're in a pretty good position with respect to Commercial Real Estate.

Our corporate customers are generally strong, middle-market, investment-grade sort of companies. And we think that they have both the financial resources and the liquidity in order to be able to sustain through this cycle. But it's going to -- they clearly are going to be stressed. And maybe just as a reminder, the at-risk industries represented about 11% of our overall portfolio in terms of commitments. So we believe that, that's going to be manageable as we go through the crisis.

Wells Fargo & Co - Morgan Stanley Virtual US Financials Conference (6/10)

Answer – Betsy Lynn Graseck: I wanted to just kick off a little bit on what you're hearing from clients in terms of how the economy is likely to evolve from here. From your consumer plans, from your corporate clients, what are you getting with regard to spend patterns and borrowing patterns that give you some insight as to how things are going?

Answer – John Richard Shrewsberry: Sure. There's a lot there. So on the corporate side, I would say that people are dealing with mixed signals. We said the market seemed very strong on the one hand. Then we got that unexpected, not as bad as anticipated, unemployment trends a week ago. But I think on the ground, people are -- they're cautious. They're -- they have a liquidity preference. This is corporate customers in particular. And they're very concerned about when the economy reopens, at what pace. Then you pile on the social unrest over the last couple of weeks has added even more uncertainty. So a relatively defensive posture, for sure.

On the consumer side, in borrowing patterns, obviously, mortgage is strong because rates are so low. You've got people now moving out of cities into suburbs, a range of things that have caused -- in addition to refi, obviously, you've got plenty of demand for mortgage. Credit card down in borrowing levels, which reflects credit card purchase activity or spend activity. We'll talk about that in just a second.

Auto was very quiet for a while because people weren't going to dealerships during shelter-in-place, but that's begun to open back up a little bit. And so the demand for auto loans is there.

Across corporates, on the borrowing side, we all, I think, saw a big spike in March as markets were closed and people wanted to stockpile liquidity. That has abated. Those balances have come back down. And I'd say there's -- and that you've seen it in the H8 data, but there's not as much demand for corporate credit right now as people are behaving more defensively. There are people who are going to the market extending maturity, taking advantage of low rates, but incremental credit, other than just adding a little cash here or there isn't creating big demand. On the -- please, go ahead.

Answer – Betsy Lynn Graseck: No. Go ahead. No, your turn.

Answer – John Richard Shrewsberry: On the spending front, I've seen some of the other banks talking about what they're seeing in their consumer businesses. So our debit card spend before COVID was up low to mid-single digits through the beginning of March, which is as it has been for some time. And obviously, we have a big debit card network and program. In late March, we had 3 weeks of down about 20%. By May 8, we got back to positive. So it was -- through April, it was improving and then the week ending May 8. And this is the week this year versus the same week last year. So we're up to about 3 weeks in a row of up low to mid-single digits in debit card spend, which is about where it was before March. Now that isn't all employment related. That includes the benefit of stimulus and other things, I'm sure, that are running through people's cash accounts.

In credit card, we were down mid- to high 30% same week year-over-year. We're still down high teens as we sit here today in credit card spend. And the big losers there, the worst performers are travel, entertainment and restaurant. No surprise. I think we've been hearing that for some time. So hopefully that's helpful.

JPMorgan Chase & Co - Morgan Stanley Virtual US Financials Conference (6/9)

Answer – Betsy Lynn Graseck: Got it. Okay. All right. Let's turn to some of the client insights that you're getting from how your consumers are behaving. Just wanted to get an update on spend patterns and borrowing patterns. Is there any differences in spend on geography, FICO or employer? And maybe you can give us a sense on the borrowing side as well. Is demand coming from existing? Or is it more coming from new?

Answer – Gordon A. Smith: Yes. The year started so strongly. And we talked internally about what would the next downturn be driven by. And in many conferences, people talked about -- it's -- we're in late cycle. I don't think anything -- anyone expected it to be a pandemic.

And if we look at debit and credit card growth, in January and February, we were solidly at 9% growth. That dropped to about 5% in March. And in April, consumers really retrenched aggressively, debit and credit spend down for us 23%. We then, as May began to progress, began to see some improvements. We were down -- these numbers are year-over-year, Betsy. We were down 15% year-over-year. And in the first week of June, we're down 12%. The states that are opening up are modestly and only modestly better. But I think that that's just very, very early.

The -- my observation of customer behavior is that people have been very careful. They have retrenched. They are carefully managing their balance sheet. Where people are spending, it's on their rent payments, their mortgage payments, on essentials around food and so on. So I think I've seen the consumer just be very prudent in their actions.

In terms of as we think about the different asset classes, demand for borrowing in the credit card space is very low, very weak right now, which is exactly what you'd expect because it sits in parallel with consumer spending on credit cards. So people have pulled back, and credit card is very low demand.

Auto, we started to see really from the last week of May and the first week of June a real improvement. Now whether 2 week's a trend, who knows? But obviously, sales have been very weak for 8 or 10 weeks. People weren't going out to car dealerships to -- whether they we're even open -- to buy cars. And in the last couple of weeks, we've seen sales on a year-over-year basis up about 15%. So I think I would mark that down as an encouraging early sign.

And it's true on the -- on mortgage originations. In terms of purchase, which are obviously heavily suppressed over the course of the last 8 to 10 weeks, starting to look like it's coming back. Refi, of course, with rates at this level has been extremely strong.

But that's kind of how I would look at the asset classes. And now with New York, New Jersey, Connecticut, the Tri-State area, really beginning to pick up -- or to open up, it will be interesting over the next 30 days to see what type of momentum we begin to drive there. But I think there are definitely early signs of optimism.

Bank of America Corp - Morgan Stanley Virtual US Financials Conference (6/9)

Question – Betsy Lynn Graseck: Got it. Okay. Yes. And that's an important point you made earlier that this survey of clients is -- a client, however you touch it, be it either the payments or loans, they're not all loan clients. So that's a good reminder there.

Maybe we could shift to the consumer and consumer behavior and what you're seeing there. It's been another 2 weeks plus since we've heard from BofA. And so how are you seeing forbearance request trending? And then how are you seeing spending going in the opened versus unopened market? A little color there would be helpful.

Answer – Dean C. Athanasia: Yes. I look at it -- if I just -- if I could comment on credit and debit spend and just keep it simple. But we entered the year in January and February, things were looking pretty good. You had 6% to 8% growth year-over-year. Then things started to happen in March, obviously, in the second half of March, and that year-over-year spend went down by 6%, so negative 6% year-over-year. April was definitely the worst. Combined debit and credit spend was down by 25%. And then we started to see things rebound in May. May was only down by 12% year-over-year, so cut it down half. And we're early here in the month of June. So the first week or so, I think we're maybe down like 5% or 6% year-over-year, measuring that credit and debit spend.

So you can start to see things -- that gives you sort of a general sense of how things started and then where they came to with April, definitely the worst. Obviously, all the financial stimulus out there is helping us -- or helping the clients, I should say, and that spend is out there and savings is out there. So consumers and small businesses continue to use that to their advantage.

In terms of just pure deferrals, March, definitely one of the -- March and April, April, definitely the high point. I would say, overall, May, probably about only 20% of what it was in April. And June is shaping up to be maybe 10% to 15% of May. So if you think of the deferrals are down, people generally did not know what their outlook was in April, so they came to us and asked for a lot of assistance. May, that was down by 80%. And then it's early yet for June. But again, that looks like it will be sort of 10% of even May. So that's how far deferrals have gone down and come down.

Now all that's helped out by -- as states reopen, and we're starting to see higher spend. In some of the states, particularly New York and California, are big -- have big impacts on spend. Other businesses coming online, more spending on restaurants and gas, up 35% and 22%, respectively, year-over-year as of the end of May. So things are starting to happen from a spend. We're a long way from where we were. But as things come back state by state and then the individual spend categories as people move away from just essentials to spending more on food, services, clothing and other retail aspects, you'll start to see that pick up more and more.

Mastercard Inc - William Blair Growth Stock Conference (6/9)

And then the last but not the least is cross-border. And you can see in cross-border, it's pretty static between the May 7 metric and the May 28 metric. And candidly, that's largely impacted by travel. And until travel starts to really come back, right, that's going to be one which we have to closely watch on that. When I say travel, I don't mean domestic travel. We're starting to see domestic travel come back, but in the nature of cross-border travel there.

Now on cross-border, important to realize that we've given you this breakdown which is how we're seeing card-present growth take place, how we're seeing card-not-present growth take place and then card-not-present ex travel. Card-not-present ex online travel continues to show solid growth. You can see that in the metrics we've put out. And we're seeing a modest improvement in card-present -- sorry, in the online card-not-present component of cross-border. And that's being driven by, again, people starting to make a little bit more in the nature of bookings coming through in the nature of online travel, but very modest amounts of growth. At the top of the house, the numbers are fairly even between May 7 and May 28, so I wouldn't make too much of what we're seeing there at this point in time.

One more point of note that I'll flag, Bob, is from a foreign exchange standpoint, we had at the time of the first quarter earnings call shared with you that we expect to see a 1 ppt headwind on our revenues in Q2 and a 1 ppt tailwind on our operating expenses on account of foreign exchange. Given where we've seen foreign exchange play out so far and -- as our current estimate that, that will be a 2 ppt headwind on net revenues and a 2 ppt tailwind on operating expenses. So I thought I'd share that as well.

American Express - Moffettnathanson Payments, Processors, and IT Services Summit (6/3)

Answer – Lisa Ann Dejong Ellis: All right. Let's talk about spending volumes. Many of your peer networks have been providing pretty real-time updates on what's going on. I think that's been enormously valuable not only to the investor community, of course, but also to governments, too, retailers, too, just people trying to manage their businesses through this and understand what is going on. Just what are the latest trends that Amex that you've disclosed as a company?

Answer – Jeffrey C. Campbell: So the first comment I'd make, maybe overarching maybe you said is like you, we hoover up every single bit of data that any of our competitors, any of the many different companies gathering data are publishing these days. And the observation I would make actually is that we're all seeing pretty similar trends if you adjust for different mixes of industry, different mixes of customer segments and different mixes of product, right? So debit is down less than credit across the industry because it is more about essential spending.

So if you think about Amex, we are fairly unique in the fact that we went into this. If you look at last year's numbers, with about 29% of the spending volume over our network being travel and entertainment-oriented, much higher than anybody else's, we also had a more premium-focused Card Member base, which is going to do a higher percentage of discretionary spend.

So if you think about those mix differences and you dive into our numbers, they're showing really the same trends you see elsewhere. So on April 24, we showed, to your point, very real-time data. And we showed that at that time, overall volumes we're down about 45%. Today, they're down probably in the mid-30%. So you're seeing about 10 points of improvement. If you break that down, T&E was down about 95% in mid-April. Today, it's probably down around 90%. And if you were to break T&E down into its components, again, I think you can see that the results are pretty intuitive, which is cruise line and airlines are down still more than 90%. Hotels look a little better as do restaurants -- or excuse me, restaurants look a little bit better. And then hotels are right about at that 90% average.

If you look at non-T&E spending, it was down 20% to 25% in mid-April. Today, it's down probably in the low teens. And if you break that into online and off-line, online spending is actually growing in the nice -- as long as you take the T&E piece out because, of course, a lot of T&E is done online.

PayPal Holdings Inc - RBC Financial Technology Conference (6/2)

Question – Jason Alan Kupferberg: Well, terrific. Let's jump right in. I wanted to get just some feedback from you on what kind of spending themes that you're seeing emerge as some countries, states have obviously been moving along with the reopening process. Has there been any significant reversal in the e-commerce behavior so far as people are actually going out and about more because it seems like that's kind of one of the biggest unknowns or the main point in your business?

Answer – John D. Rainey: Sure, Jason. So I think that is the, perhaps, multimillion-dollar question for all of us is how much of what we're seeing are sustainable trends. Clearly, we benefited from the growth in e-commerce that we began to see towards the tail end of March and very clearly in our results in April and as we move through the second quarter. And we have been closely watching this by both vertical as well as region of the world to see or assess the sustainability of these trends. And a couple of the markets that we had a keen eye on are some of the markets that relaxed their shelter-in-place measures earlier than others, so examples would be Austria or Germany. And at the sort of -- if we look at like April results, the growth rates in those countries were 2 to 3x what they were going into the period right before coronavirus. And we're still seeing, even in these countries and as we look at states across the country, we're still seeing elevated levels, much more elevated levels of e-commerce activity. And so it's -- whether it remains at this level, I think that sort of remains to be seen. But I think, certainly, we recognize that some of these shifts are likely to be permanent. As people are experiencing things like purchasing groceries online for the first time, and they realize that that's not a bad experience at all. Or they're venturing into things like buy online, pick up in store, and those are things that are just simply more convenient for customers. And so we do expect to see higher levels of growth than perhaps what we saw going into this. And I think, in some ways, this may have accelerated some of the trends that we were seeing in e-commerce by, quite candidly, maybe a number of years.

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