After two quarters of massive additions to credit loss reserves, some major credit card lenders are already exiting special COVID-19 payment deferral programs for borrowers.

Forbearances have helped keep delinquencies low, despite a spike in unemployment. Credit performance has also been supported by extra unemployment insurance and direct government checks to households that kept aggregate personal income higher from April through July than it was before the pandemic.

Whether reserve levels, which cover 11% or more of current receivables at most big card issuers, are still insufficient or whether substantial reserve releases might be coming in future periods remains unclear. The answer largely depends on how long it takes employment to recover, which in turn depends on the pandemic and whether there will be another large federal aid package.

"As you think about the importance of the government programs, it's less about the $1,200 check that a family gets as you think about life-of-loan losses and what that will support. It's really the impact of those on the overall economy and keeping the trough from being too deep," Discover Financial Services President and CEO Roger Hochschild said on a conference call in July. "We really think about it just in terms of at a macro level as opposed to what those checks may do in one month for a given household."

Rapid job losses as the pandemic emerged in the U.S. propelled unemployment to 14.7% in April, far higher than at any point during the financial crisis a decade ago, before recovering to 10.2% in July. While unemployment is widely expected to remain high for years, forecasts generally anticipate a relatively steady recovery. The median projection among Federal Reserve policymakers for the end of 2022 is 5.5%.

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By contrast, unemployment increased for about two years after the official start of the previous recession, peaking at nearly 10%, and did not fall below 9% for about another two years. Overall, average quarterly unemployment during the three years after the last recession started is about the same, at about 8%, as average mainstream forecasts for the three years after the recession that started in March.

As borrowers exit forbearance programs and the boost from fiscal relief spending fades, the historically strong relationship between unemployment and credit performance anticipated by sizable bank loss reserve levels is likely to reassert itself. But "all the deferrals and the accommodations that are taking place are really clouding what may be going on in the underlying credit quality," Moody's Senior Vice President Allen Tischler said. "It's just going to take a little bit of time to ascertain the true picture of credit quality of the banks."

Moody's expects bank credit card net charge-off rates to peak at between 7.0% and 8.0% in 2021, or about double 2019 levels. That would still be lower than during the last cycle, when NCO rates spent five quarters at or above 9.8%, according to data from the Federal Deposit Insurance Corp. Moody's noted the size and the speed of the fiscal support packages so far during the pandemic and said underwriting was stronger heading into the current crisis compared with the last one.

At the seven largest U.S. card issuers, NCO rates ranged from about 3% to about 5.5% during the second quarter.

While deferrals have played an important role in keeping delinquencies low, borrower uptake of credit card forbearance programs has generally been lighter than in other consumer categories. For example, JPMorgan Chase & Co. disclosed that 3.1% of its card balances had been granted three-month payment deferrals, with the possibility of monthly extensions for a total of six months, as of June 30. By contrast, 8.7% of its mortgage balances were in three-month deferrals that could be extended for up to a year.

JingJing Dang, an associate managing director at Moody's, said comparatively low enrollment in card payment deferral programs reflects the product's relatively small minimum payments, which automatically provide some flexibility to borrowers.

With help from temporarily enhanced unemployment insurance, many consumers have continued to make payments even while they were enrolled in forbearance programs, banks have reported. American Express Co. and Discover have already said they are ending COVID-19 deferral programs, but they have other payment relief options for struggling borrowers.

Weekly enrollment in Discover's "Skip-a-Pay" program peaked at $673 million in early April and fell to $25 million in early August. Enrollments in American Express' pandemic relief program peaked at $8.5 billion of credit card loans and charge card receivables in April and fell to about $700 million at June 30, but balances in its longer-term relief programs increased to $2.58 billion at June 30 from $762 million at the end of 2019.

At Synchrony Financial, $1.1 billion of receivables remained in deferral programs at June 30, compared with $3.2 billion enrolled cumulatively during the first half of 2020. Synchrony said in July that accounts exiting deferral were becoming delinquent at three times the rate of other similar accounts.

Capital One Financial Corp. cumulatively enrolled $3.0 billion of its domestic card balances in pandemic deferrals as of June 30, but just $360 million had been approved to skip their next payment at that time.

While borrowers leaving payment deferral programs and low delinquencies so far are welcome news, "past performance is not necessarily such a great predictor of future performance at a time like this," Chairman, CEO and President Richard Fairbank warned in July.

Capital One did not build additional fiscal support for workers and the economy into its credit loss allowance, and CFO Richard Blackley said delinquencies will eventually "normalize" to unemployment.

"If we do see some of the stimulus just suddenly drop off, I think we will see some cliff function around that starting to translate into delinquencies," Blackley said.