March 31, 2025 | Premium Service | In the this issue of The Institutional Risk Analyst, we ponder the world of consumer credit two months into the Trump Administration. Readers may recall that we were cautious in 2024 about calling a consumer recession despite the many voices in the media and elsewhere who have been predicting an economic slump since 2023. Didn’t happen, but 2025 is already very different.
First and foremost, 2025 remains about deteriorating credit in the commercial real estate and multifamily channels, as illustrated by the shellacking that Bank OZK (OZK) is taking in Chicago in two stalled commercial development deals. As we discussed with Dan Proft & Amy Jacobsen earlier this week, what is uber banker George Gleason, CEO of OZK, doing lending on new development in suburban Chicago?? IOHO, Illinois in the hands of progressive Democrats is uninvestable. And New York State is right behind.Â
Second, the US economy is slowing and inflation is going up in the most recent release from the BLS. During the past four years of COVID and aggressive fiscal policy by the Biden Administration, the economy benefited from vast excess cash flows. These monetary and fiscal flows tended to overstate the true level of economic growth and employment, while suppressing the visible cost of credit. Now these factors are being reversed as the Trump Administration seeks to shrink the public sector even as the Fed is backing away from any interest rate cuts in 2025.
Below we look at our consumer lenders surveillance group – including Ally Financial (ALLY), American Express (AXP), Axos Financial (AX), the US unit of Barclays Bank (BCS), CapitalOne (COF), SoFi Technologies (SOFI) and Synchrony Financial (SYF) – as we prepare for the release of Q1 2025 earnings. Readers may recall that back in Q3 2024, the market was expecting a couple of cuts in the target for short-term interest rates by the FOMC. The financials saw a big uptick in lending volumes, and better revenue and earnings as well, largely because the bond market rallied. Since that time, however, a number of names have retreated as concerns about credit and the economy have come back into focus.Â
Meanwhile in Washington, the Trump Administration is rolling back many of the policies of President Joe Biden, policies that masked a significant amount of consumer pain. Reductions in the availability of credit from HUD, and Fannie Mae and Freddie Mac, may accelerate the deterioration of consumer credit already visible in credit cards and autos. Well-intentioned cuts in multifamily lending by the Trump White House may cause an already rancid sector to roll over entirely. Multifamily loans supported by HUD and the GSEs are the new subprime. We expect losses in this sector to increase significantly this year.
