Credit-Card Debt: The Next Possible Implosion

Several major banks and credit-card companies are looking to drive growth by tapping into new credit-card customers at home and abroad, according to outlooks they provided in recent weeks. Whether this will ultimately help the banks -- or cash-strapped consumers -- is uncertain and depends on whether the economy can regain its footing.

American Express(AXP - Cramer's Take - Stockpickr) said Wednesday that profit from its U.S. card business fell nearly 20% last quarter as it spent more to attract new business and faced higher delinquency rates and charge-offs. However, earnings from its much smaller international segment rose 30% on higher borrowing and spending by cardholders. CEO Kenneth Chenault said the company is targeting affluent U.S. consumers and new customers abroad.

Bank of America(BAC - Cramer's Take - Stockpickr), the largest U.S. retail bank, said earlier in the week that credit cards represented nearly two-thirds of the bank's consumer losses during the period. Delinquencies of 30 days or more rose to 5.61%, up from 5.45% in the previous quarter. They were particularly higher in states worst affected by the housing market -- like California, Florida, Nevada and Arizona -- which make up about a quarter of Bank of America's card portfolio.

Still, Bank of America remains hopeful as consumers keep spending: It had 10% higher outstanding card balances last quarter, on average, than during the same period a year ago. "Even though the economy has slowed, we continue to add new retail customers and expand our relationships with existing customers," CEO Ken Lewis said during a recent conference call.

Similarly, Citigroup(C - Cramer's Take - Stockpickr) posted higher U.S. credit-card write-offs during the first quarter as delinquencies advanced at a faster rate and more customers filed for bankruptcy. JPMorgan Chase(JPM - Cramer's Take - Stockpickr) said its card-services business had a 20% profit decline in the same period. That was caused by higher charge-offs, but also increased spending to draw in new customers.

Despite all the bad news -- more debt, more delayed payments, more bankruptcies -- there are some silver linings for the banks. As the U.S. market soured, Citi opened 2.3 million new card accounts abroad last quarter, particularly in Mexico and India, where the economy and middle class are growing rapidly.

Even in the U.S., not all the news is foul.

Capital One CFO Gary Perlin noted a "striking finding" that about two-thirds of its credit-card customers who were 90 days or more past due on mortgage payments were still current with credit-card payments. That figure has remained steady over the past year, he said, because consumers "have a bias to pay the loans that ... provide enduring value."