Given the glimmers of improvement in second-quarter results, credit card lenders are hoping for an endless spring.

Seasonal factors, like tax refunds, certainly played a role in declining delinquency rates. But on quarterly conference calls this month, executives at the largest issuers held out the possibility of more progress to come.

Their guarded optimism was in sharp contrast from the first-quarter calls held in April, when the beleaguered officials shied away from long-term performance forecasts for the card business.

Despite their newfound sense that the ball may no longer be rolling off the table (to borrow an image from National Economic Council Director Lawrence Summers), issuers described an industry in the midst of wrenching change.

Bad debt continued to stagger firms during the period, and, despite a moderation in delinquency rates, could drain capital well into the future.

"We're still in a period where there's a lot of variability in" credit performance numbers, said Sanjay Sakhrani, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "We haven't seen any kind of sustained trend."

But the recent improvement, even if underpinned by seasonal factors, "is a positive, particularly given the fact that we're at higher absolute levels of unemployment than we were a year ago," he said.

American Express Co. stood out by flatly predicting it had reached a peak in credit losses after hitting a chargeoff rate of 10% in the second quarter.

A turnaround would put an end to a dramatic rise in credit losses that followed the $117 billion-asset New York banking company's decision to ramp up lending before the recession.

Differentiation

While Amex may have escaped its tailspin, Bank of America Corp.'s chargeoff rate worsened dramatically.

The $2.3 trillion-asset Charlotte banking company joined other issuers in posting an improvement in delinquencies, but its chargeoff rate surged 311 basis points in the quarter to 11.7%. That was a far bigger jump than any of its largest competitors and pushed its year-over-year deterioration to 577 basis points, also the worst performance.

Last week, Moody's Investors Service Inc. placed all of B of A's credit card-backed bonds on review for possible downgrade because of "the continued sharp erosion in the credit quality" of its portfolio.

In January 2006, B of A bought the credit card lender MBNA Corp. Subsequently, the company expanded its card unit beyond the affinity groups that made up the core of MBNA's business.

"You got more of a borrower than a transactor and that, obviously, in this kind of downturn, has led to where we are," said B of A's chief financial officer, Joe Price.

Amex CFO Daniel Henry attributed his company's better-than-forecast chargeoff rate in the second quarter to a smaller increase in bankruptcies than it had expected.

The issuer's forecast that the chargeoff rate would decline in the second half was based on a decline in early stage delinquencies for five consecutive months through June, he said.

Even with a decline in the chargeoff rate, Henry said, it could be a long road to "normal."

"Both spending will have to improve quite a bit," he said, "and writeoff rates will have to improve quite a bit before we get to the point where we would be looking for normalized earnings," which the company expects to be a return on equity of above 20%.

Capital One Financial Corp.'s chargeoff rate increased 84 basis points from the previous quarter to 9.2%. Even after adding 35 basis points to that increase — to counteract the company's decision to lengthen the time after a customer files for bankruptcy protection before it recognizes chargeoffs — the rise in Capital One's loss rate was lower than at its four largest competitors.

Yet Capital One was the most guarded company in the group about signs of improvement in loan performance.

The company's chief executive, Richard Fairbank, said he saw no "really important 'green shoots' in the credit performance of consumers" in the second quarter, which he said was "really about seasonal benefits" and federal stimulus distributions resulting in "slightly better-than-expected credit performance."

Fairbank said his $172 billion-asset McLean, Va., company expects its chargeoff rate to increase for the rest of this year "as the economy continues to weaken" and its receivables — including installment loans it stopped making last year — contract, among other factors.

During the recession so far, he said, cardholders have worked assiduously to stay current on their accounts so they do not have to pay late fees. But of those who do fall behind, higher percentages have progressed to more serious stages of delinquency.

The net effect has been to create "a sour spot of fewer revenues and more chargeoffs," Fairbank said.

Other companies' optimism was often leavened with tautological qualifications — for instance, that a decline in credit losses hinges on continuing improvements in delinquencies.

"Those trends, if sustained, could eventually stabilize losses," B of A's Price said.

The Moody's index of delinquency rates for securitized credit card receivables has fallen for three consecutive months to 5.81% in June — its lowest point this year, but still 136 basis points higher than a year earlier — with nearly universal improvement among issuers.

But in a note last week, a group of Moody's analysts wrote that June is typically "the annual low point" and that they expect "seasonal effects to begin waning next month, leading delinquency rates to resume their upward trajectory through the remainder of the year."

The Moody's index of chargeoff rates increased 14 basis points from the previous month to 10.76%. The analysts predicted that chargeoffs would peak at 12% to 13% in the middle of next year assuming a "coincident peak in the unemployment rate of 10% to 10.5%."

Leading Indicator

The second-quarter improvement in delinquency rates tracked a decline in initial unemployment claims compiled by the Department of Labor after a peak of 674,000 in the week that ended March 28.

Claims had surged during the preceding nine months, from about 400,000 toward the end of last June, as labor market conditions disintegrated.

Jobless claims provide a direct window onto the number of people losing the financial wherewithal to make payments each week, Sakhrani said. "The jobless claims number is the purest number and the most frequent number we have of individuals newly facing financial stress."

Advance figures so far this month have all been under 600,000, which Sakhrani said makes him "a little bit more comfortable with some of the assertions being made that credit seems to be doing better on the margin."

Still, it may be a while before credit losses fall substantially, as elevated (though reduced) jobless claims indicate further increases in unemployment, Sakhrani said.

Amex's Henry noted that during the recessions in the early 1990s and the early part of this decade, chargeoff rates across the industry peaked before the unemployment rate peaked.

"Now whether that is going to be the case this time or not, we are going to have to wait and see," he said.

JPMorgan Chase & Co.'s CEO, James Dimon, said his company's credit card business would probably continue to lose money next year as it struggles to adjust to loan losses and the Credit Card Accountability Responsibility and Disclosure Act. (President Obama signed the law in May, and its most substantive provisions, including prohibitions on rate increases, go into effect in February.)

The unit has posted losses for three consecutive quarters, with the largest — $672 million — in the most recent one.

"A big part of that business is fine," he said. "It earns a decent return. We don't have to make a lot of changes, and then there's a chunk of it — 30% or 40% — we're going to have to make some real changes."

Dimon said the business might emerge from its transformation 10% to 15% smaller, "but it will return to normal profitability because otherwise you wouldn't be in the business at all."

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.