Rapidly deteriorating employment conditions are propelling losses on card receivables into unfamiliar territory.

In fourth-quarter reports, major issuers said they are working under forecasts that joblessness will reach levels not seen in almost three decades, making the last two recessions uncertain guides. The issuers either ratcheted up their projections for credit losses or did not provide firm targets.

Other clouds have also formed. Strained consumers are paying off card debts more slowly, working against efforts by lenders to rein in risk. Declining spending, which means less interchange income, is hitting American Express Co., which runs its own network, particularly hard. And a range of regulatory, accounting, and legislative changes — including the possibility that Congress will let bankruptcy judges modify mortgages on primary residences, prompting a rise in filings and defaults on other forms of debt — threaten to add to the pressure.


"Credit cards started to fall apart and see problems long after the mortgage problems started," said John Williams, an analyst at Macquarie Group. "So it's not unreasonable to make the argument that this is still in a somewhat earlier stage than real estate is at this point, and there may be a lot more to go."

During the fourth quarter the chargeoff rate on Citigroup's portfolio of cards bearing its name (rather than private-label ones it issues for retailers) surpassed the peak of 6.44% after the early 1990s recession.

"It is unclear how closely credit loss behavior in the current recession will correlate with the 1990s recession," Gary Crittenden, Citi's chief financial officer, said on its fourth-quarter conference call this month. The New York company also said its portfolio was flat from the third quarter but fell 3.5% from a year earlier, to $151 billion; drops in purchase volume and balance transfers were offset by declining payment rates.

Richard Fairbank, the chief executive of Capital One Financial Corp., said during its call that during the last two recessions growth in the industry's receivables slowed, but there was still growth.

By contrast, in the current downturn, "you're going to see a lot less in the way of growth and maybe a fair amount of decline this time," he said.

Sanjay Sakhrani, an analyst with KBW's Keefe, Bruyette & Woods, said he expects the industry's chargeoff rates to surpass those seen during the last two recessions, because of the bleaker employment outlook. But he also said issuers already enjoy substantial support from the government, "and some of the businesses that may have faltered previously probably won't."

Capital One raised its projection for this quarter's chargeoff rate from about 7.5% to about 8.1%. It said the more severe forecast was the result of declining receivables and the deterioration of closed-end unsecured loans — a business it mostly ended at the beginning of last year.


"We can't be certain how much or for how long these economic headwinds will continue to impact our credit performance and outlook," said Gary Perlin, Capital One's CFO. Its fourth-quarter chargeoff rate increased 95 basis points from the third quarter and 224 basis points from a year earlier, to 7.1%, in line with the guidance it gave in October.

Managed receivables increased 2.3% from the third quarter and 1.8% from a year earlier, to $71 billion. Fairbank said the growth was driven by "weak but still positive seasonal balance growth, a decline in payment rates, and fewer balance transfers away" from the company.

Capital One's provision for losses in its credit card business increased 61.3% from the third quarter and 67.4% from a year earlier, to $2 billion, as the company built its overall reserves by $1 billion in anticipation of the unemployment rate hitting 8.7% by yearend.

Fairbank also said declining home prices are a bigger factor now than in past downturns. "Consumers' ability to just absorb bad things is harder when there are multiple bad things." Nevertheless, he called the card business "by a large margin the most resilient consumer lending business in the downturn."

The chargeoff rate in Amex's U.S. card business increased 80 basis points from the third quarter and 330 from a year earlier, to 6.7%. Its provision for credit losses increased 3% from the third quarter but fell 3% from a year earlier, to $1.4 billion. The company said its results for the fourth quarter of 2007 included a significant boost to reserves in response to a sharp deterioration in credit trends.

Scott Valentin, an analyst at Friedman, Billings, Ramsey Group, wrote in a note to clients Tuesday that Amex's assumption that unemployment will peak at 8.5% this year "may prove too optimistic," and that its fourth-quarter performance was aided substantially by an "unsustainable low provision."

Sakhrani expressed surprise in a note to his clients that Amex "did not do more to bolster reserves." He predicted the chargeoff rate in its U.S. card business would rise to 8.3% this quarter and 9.5% next quarter.

Kenneth Chenault, Amex's CEO, said during its conference call, "This is one of the most difficult operating environments we have seen in decades."

Daniel Henry, its CFO, said lines of credit Amex had cut had been offset by new cardholders and increases in lines to more creditworthy customers.

Bank of America Corp.'s CEO, Kenneth Lewis, predicted in July that chargeoffs would stabilize late last year and begin a slow recovery in the first half of this year. But during the Charlotte company's fourth-quarter call, its CFO, Joe Price, said that unemployment will top 8% this year, and that its chargeoff rates would probably exceed that by a percentage point and could rise even further with a decline in the size of the portfolio.

JPMorgan Chase & Co. once again increased its outlook for chargeoffs. Excluding the portfolio it acquired in buying Washington Mutual's banking operation, the New York company projected that its chargeoff rate would approach 7% this quarter and might increase to about 8% near the end of the year. It had previously forecast a chargeoff rate of 6% for the start of the year and 7% by yearend. Including the WaMu portfolio — half of which the company said it plans to allow to run off — the chargeoff rate increased 56 basis points from the third quarter, to 5.6%.

JPMorgan Chase's receivables grew 2% during the fourth quarter, to $190 billion. James Dimon, its CEO, said it is "very hard to tell" what will happen to the portfolio's size, because of countervailing factors like lower spending and lower payment rates.

Nevertheless, "our share is going up," he said. "We think we are in the secure part of the segment, and we added a lot of clients. We continue to market."

Since 2004, Citi has built up its portfolio of private-label cards, which produce heavier credit losses and accounted for 37.1% of its $151.1 billion of receivables at yearend. Its overall chargeoff rate increased 91 basis points from the third quarter and 294 basis points from a year earlier, to 8%. Receivables on Citi-branded cards fell 0.9% from the third quarter and 3.6% from a year earlier. Receivables on private-label cards increased 1.6% from the third quarter but fell 3.3% from a year earlier.

Issuers continued to adapt to a broken securitization market. Perlin said Capital One does not plan on issuing card-backed securities this year. At the current spreads, "we're buyers, we're not sellers" — Capital One has been using its deposit base to build up its investment portfolio.

"Recently we've taken advantage of the dislocation in the capital markets to acquire relatively short-duration, high-credit-quality securities," Perlin said, including bank debt guaranteed by the Federal Deposit Insurance Corp. (FDIC), agency mortgage bonds, and "asset-backed securities in classes we know very well."

In response to the securitization market freeze, Amex has rapidly reshaped its funding model, including converting to a bank holding company to take advantage of government support and launching a brokered certificate of deposit program through which it raised $6.2 billion in the fourth quarter.

Henry said it plans to launch a direct deposit program, "both online and offline," next quarter.

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