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Consumer Finance – Unemployment's Impact on Net Charge-Offs: Then vs Now

The consumer finance research team published a deep dive analysis of the relationship between unemployment and the consumer finance space. This franchise report states that while government stimulus has skewed the relationship between rates of unemployment and consumer loan net charge-offs (NCO), that will prove to be temporary. The report stresses that pre-2020, each 100 basis points increase in UE was associated with a 51 basis points increase in net charge-off rates, but since then the beta has been closer to 35 basis points. Looking forward, the team anticipates net charge-offs peaking in 2024 between 5% and 8% based on an analysis of soft vs hard landing scenarios. In addition, this scenario analysis reinforced OMF and SYF as his preferred picks.

— John Hecht, Consumer Finance