The card industry appears to be ever-so-slowly emerging from its harshest credit cycle.

Credit losses remained heavy across the board in the third quarter, but in conference calls this month, some issuers were, if not upbeat, at least neutral in their interpretation of a recent reprieve from chargeoffs.

Bank of America Corp., which posted the highest chargeoff rate for the quarter among the five largest issuers, declared that the buildup in its bad loans has "plateaued." JPMorgan Chase, meanwhile, emphasized the pain ahead.

Capital One Financial Corp. projected a peak in the dollar amount of its credit losses in the "next couple of quarters" and a peak in the chargeoff rate after that because its portfolio is shrinking.
But "nearing a peak does not necessarily mean that we're nearing the beginning of a robust recovery," CEO Richard Fairbank said. His company expects unemployment to "remain stubbornly high throughout 2010."

JPMorgan Chase CEO James Dimon, who described work on new products and the company's capacity to distribute through its large branch network, said, "What we are doing in the card business is really looking past 2010."

Pressed about the future of his company's card business in light of credit losses that were worse than those at competitors, BofA CEO Kenneth Lewis cited the sea change in industry regulation and said, "It would be premature to tell you what it will look like in any exact form. But it is going to be different. We acknowledge that, and we are working on it."

BofA cut the net loss at its credit card business by 35.9% from the previous quarter, to $1 billion, as it allowed its provision to drop by about $600 million, excluding the impact of maturing card securitizations.

The net loss at JPMorgan Chase's card unit widened by 4.2% from the previous quarter to $700 million as it enlarged its allowance by 5.2%, to $9.3 billion. The company predicted results could be substantially worse in the first half of next year.

American Express Co.'s loss rates appear to have rounded the corner, and the company said it expects credit expenses to continue to fall this quarter and that it is increasingly focused on growth opportunities. But Chief Financial Officer Daniel Henry said a return to "more normalized core earnings" would not occur until two things happen: healthy growth in gross domestic product, which spending volumes have historically mirrored; and a moderating of credit loss rates. Such moderation took hold over six or eight quarters after the last two down cycles in the early part of this decade and the early 1990s.

Capital One projected that its chargeoff rate would continue to increase this quarter. But the McLean, Va., company stood out for its confidence over its ability to work through and emerge from the regulatory overhaul with its profitability intact.

"The more we have really gotten our head around the Card Act and what are its many, many impacts on how the business works and on us, I think we are increasingly bullish that … you are not going to see a big striking effect once the Card Act goes into effect," Fairbank said.
Revenues, as a percentage of average domestic credit card balances, jumped 230 basis points from the previous quarter to 16.8% at Capital One, in part because of price increases the company implemented earlier in the year. It projected that the margin would stay above 16% this quarter and be close to that mark next year.

Fairbank has pointed to the "go-to rate" — the core interest rate on card accounts after teaser periods expire — as a key indicator of the future of the industry. Higher initial pricings are needed to offset the outlawing of penalty increases. He said that after adjusting for changes in the prime rate, there has been an industrywide increase of about 300 basis points in the go-to rate since the summer of 2008.

The industry is in the "early stage of recognition that the go-to rate is the defining kind of indicator of origination pricing health," he said, though he believes "it needs to go quite a distance farther to really get to the kind of destination we would look for."

The pace of increase in chargeoff rates slowed sharply in the third quarter, and some card businesses even posted absolute declines.

But though job losses have subsided sharply and transient factors like tax refunds and government distributions became apparent in lower delinquency rates in the spring, a number of forecasters expect that industrywide chargeoffs will not peak until next year, roughly in tandem with unemployment.

The chargeoff rate for securitized receivables across the industry fell for the first time this year in July, but rebounded 83 basis points in August, only to drop by 57 basis points and land at 10.2% in September, according to Barclays Capital.

In a report this month, analysts with the investment bank predicted that chargeoffs would "resume their upward march shortly, peaking sometime in" the first quarter at 11% to 11.5%. The analysts cited a 15-basis-point increase in the proportion of balances overdue by more than 30 days to 5.67% in September, which they wrote was just ahead of a seasonal pattern of deterioration that typically takes hold late in the year.

Changes in the proportion of accounts overdue by more than 30 days typically feed into chargeoff rates about four months later, as accounts fall further behind and are ultimately deemed uncollectible, the Barclays analysts wrote. Because delinquencies moderated earlier in the year, the analysts predicted that chargeoff rates would continue to decline "over the next month or so" but subsequently track a rise in delinquencies through the end of the year.

BofA's chargeoff rate increased 117 basis points from the previous quarter to 12.9%. That was a far bigger rise than at its largest competitors and gave it the worst chargeoff rate overall. But it was also a smaller increase for the company than the second quarter's 311 basis points and the first quarter's 146 basis points.

The proportion of the $2.3 trillion-asset Charlotte banking company's accounts overdue by more than 30 days fell by 29 basis points from the previous quarter to 7.4% in the third quarter. It cited the decline as the reason for the $600 million reserve release.

In North America, the chargeoff rate for Citigroup's portfolio of credit cards that carry its own brand fell 11 basis points from the previous quarter to 10.15% in the third quarter. In its portfolio of cards that it issues for retailers and others — which it has placed in Citi Holdings, a repository for assets it wants to divest — the chargeoff rate fell 86 basis points, to 13.3%.


Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.