Card Companies Show Significant Q3 Profits

New financial reports show credit cards becoming profitable once again. But is this a recovery or an illusion?

Most of the major banks and credit cards reported a jump in profitability during the third quarter. New monthly numbers also show credit card delinquency rates and defaults continue to improve, boosting revenue for the issuers. This is good news for cardholders and issuers, but these improvements do not fix the problems of losses from regulations, the slow pace of recovery and projected declines in revenue in the long term.

A significant amount of this profitability posted by credit card companies in the third quarter came from issuers reducing funds set aside to cover bad loans, which they can do because charge-offs and delinquencies are falling. This indicates that banks are more confident that customers will be able to make payments on loans in the future.

This drop in delinquencies and write-offs will stop some of the bleeding, but it is not enough for long-term recovery and healthy growth. To move forward, banks and credit card issuers must find a responsible way to ease lending standards, increase lending and encourage consumer spending. They must also navigate through tougher regulations that will continue to drain away revenue.

Here are earnings, defaults and delinquencies from the major issuers:

American Express(AXP)
Third-quarter profits jumped 71% because cardholders spent 14% more than an year ago. Overdue payments continue to fall, so American Express can cut the money it set aside for bad loans.

"Lending volumes, however, remain below prerecessionary levels as cardmembers continued to manage their finances carefully and pay down outstanding debt. While this translated into lower net interest income, it also helped to improve our overall risk profile," said Kenneth I. Chenault, chairman and chief executive.

Charge-offs dropped from 5.5% in August to 4.7% in September.

The delinquency rate increased from 2.4% in August to 2.5% in September.

Bank of America(BAC)
Bank of America, America's largest bank, lost $7.3 billion for the third quarter, a surprise to many analysts. It took a previously announced one-time $10.4 billion writedown in its credit cards unit to prepare for new rules and regulations. The bank says legislation such as the Durbin Amendment, which limits interchange fees on debit cards, could eliminate its debit card revenue.

In its earning statement, the bank says it is changing the way its consumer bank does business -- providing customers with incentives to do more business with the bank instead of generating revenue through penalty fees such as overdraft charges. It plans to "begin testing new offerings in December that will provide customers choices on how to pay for their banking services and reward them for using certain products or bringing more balances." It expects these changes to generate additional revenue.