Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Delinquency Rate ====== The Delinquency Rate is a critical metric that shows the percentage of all loans within a lender's portfolio that are past due. A loan is considered "delinquent" when a borrower has missed at least one payment by the due date. Lenders typically track delinquency in buckets, such as 30-59 days past due, 60-89 days past due, and 90+ days past due. The rate is calculated by dividing the total number of delinquent loans by the total number of loans a lender holds. This simple percentage is a powerful health indicator for any institution that lends money, from a global bank down to a small credit union. For investors, particularly those analyzing financial companies, the delinquency rate is a non-negotiable metric to watch. It offers a real-time glimpse into the credit quality of a loan book and the financial stability of the borrowers, serving as an early warning system for potential losses. ===== Why Does the Delinquency Rate Matter to Investors? ===== Think of the delinquency rate as a vital sign for both individual companies and the economy as a whole. A steady, low rate suggests good health, while a rapidly rising rate can signal a serious illness. ==== A Canary in the Coal Mine for Banks ==== For investors scrutinizing banks and other financial institutions, a rising delinquency rate is a significant red flag. It indicates that the bank's customers are struggling to pay back their debts, which can stem from poor lending decisions, a weakening economy, or both. As more loans become delinquent, the bank must set aside more money for potential defaults. This action, known as increasing [[loan loss provisions]], directly reduces the bank's [[earnings]]. If delinquencies continue to worsen, these loans can be reclassified as [[non-performing loans (NPLs)]], which are loans that are close to or already in default. A high level of NPLs can seriously damage a bank's profitability and financial stability. Therefore, a smart investor will monitor a bank's delinquency rate trend to anticipate future write-downs and assess the quality of its management and [[risk management]] practices. ==== A Barometer for the Broader Economy ==== Beyond individual companies, aggregate delinquency rates are a powerful macroeconomic indicator. When rates for mortgages, auto loans, and credit cards start climbing across the entire financial system, it's often a sign that consumers are under stress and a recession could be on the horizon. People struggling to pay their bills will cut back on spending, slowing down economic growth. Central banks like the [[Federal Reserve]] pay close attention to this data. A widespread increase in delinquencies, particularly in assets bundled into securities like [[mortgage-backed securities (MBS)]], can signal systemic risk, as famously witnessed in the lead-up to the [[2008 Financial Crisis]]. ===== How to Analyze the Delinquency Rate ===== A single number tells you very little. To get the full picture, you need to look at the delinquency rate with a critical eye, considering its trend and the context surrounding it. ==== It's All About the Trend ==== Don't fixate on one quarterly report. The real insight comes from tracking the delinquency rate over several quarters and years. Is the rate stable, decreasing, or, most importantly, accelerating upwards? A sudden spike is far more concerning than a slow, seasonal fluctuation. A consistent, long-term upward trend suggests a fundamental deterioration in the quality of the lender's [[balance sheet]]. ==== Context is King ==== To truly understand what the rate is telling you, it must be compared against relevant benchmarks. * **Peer Comparison:** How does Bank A's delinquency rate compare to its direct competitors? If Bank A's rate is significantly higher than the industry average, it could indicate weak [[underwriting]] standards or a riskier loan portfolio. * **Historical Context:** How does the company's current rate compare to its own historical data? Is it approaching levels seen during previous economic downturns? This can help you gauge the severity of the current situation. * **Loan Type:** Delinquency rates vary wildly by product. Unsecured debt like credit cards will almost always have a higher delinquency rate than secured debt like mortgages. When comparing, make sure you're comparing apples to apples (e.g., one bank's mortgage delinquency rate to another's). ===== A Value Investing Perspective ===== Value investors seek durable, well-managed businesses that can withstand economic storms. A bank or lender with a consistently low and stable delinquency rate across business cycles is often a sign of a superior operation. It demonstrates a disciplined lending culture and a strong competitive [[moat]] built on prudent risk assessment. Conversely, a company that grows its loan book aggressively by lowering its standards may look great in the good times but will be exposed when the economy turns. As the legendary investor [[Warren Buffett]] famously said, "Only when the tide goes out do you discover who's been swimming naked." The delinquency rate is one of the first signs that the tide is turning, revealing which institutions are built on a solid foundation and which are not. For a value investor, it's an indispensable tool for separating rock-solid opportunities from financial sandcastles.