Consumer credit cards have joined mortgage lending as a major troublespot for U.S. banks.
Banks with large credit card arms, including
Bank of America
Capital One Financial
say that the steadily weakening economy is causing credit card purchase volume to slow, while credit card charge-offs tick up. As a result, some banks are shoring up their exposure to credit cards by tightening lending standards and curbing loan growth.
"Whether or not we are technically in a recession, our customers are feeling significant economic pressure," Bank of America's president of global consumer and small business banking Liam McGee said Tuesday morning at the UBS Global Financial Services Conference.
"Year-over-year credit and debit purchase volume by our customer continues to show stable long-term growth,
however we've recently seen a sharp increase in spending on necessities driven by the rise in fuel and food prices," McGee said. "At the same time we're also seeing declining growth rates in discretionary
items, such as retail, travel and entertainment."
JPMorgan Chase's chairman and CEO Jamie Dimon echoed similar thoughts on the state of the consumer during his presentation at the UBS conference on Monday. There has been "fairly constant deterioration in both consumer and small business credit," Dimon said.
BofA and JPMorgan Chase's cautionary comments this week reflect a fragile U.S. economy that has hit consumers hard by stemming the easy access to credit cards, auto loans and mortgages that was prevalent earlier in the decade. Losses on credit cards are typically higher than housing-related loans because they are unsecured loans.
BofA currently holds 20% of credit card-related market share, according to the company's presentation. Managed losses in BofA's $184 billion credit card portfolio accounted for 5.19% of the portfolio in the first quarter, up from 4.75% in the fourth quarter. McGee expects those managed losses to rise to between 5% and 5.5%, citing particularly those customers in areas hard hit by housing like California and Florida. (On a side note, the company says it's on track to close its acquisition of ailing mortgage lender
in the third quarter.)
JPMorgan Chase's first-quarter charge off rate for credit cards was 4.37% and could rise above 5% by the end of the year and to 6% in 2009, causing the company to likely add to its loan loss reserves later this year, Dimon said.
Oppenheimer analyst Meredith Whitney estimates JPMorgan Chase's losses could be around 6% this year and above 6% next year.
The company believes that losses in
second half '08 will be mitigated by a higher denominator from a seasonal rise in balances, however we actually believe the opposite will occur," she wrote in a note this week after meeting with the bank's head of card services, Gordon Smith.
Moody's Investor Services on Tuesday issued a negative outlook for the next 12 months for the entire consumer finance industry, which includes credit cards, auto finance, education finance and other consumer lending areas, as recession fears ring true, according to a report.
Credit card asset quality, particularly cards issued to subprime borrowers, "is deteriorating as the economy weakens and ... profitability is pressured by increased provisioning," according to a statement by its co-author Curt Beaudoin. "Industry players are responding with tightened credit, pricing increases, and more rigorous expense management."
Moody's is also concerned that large credit card-related businesses could be hurt by the myriad of regulatory initiatives proposed by the Federal Reserve, the Office of Thrift Supervision, the National Credit Union Association, even within Congress, that would subject them to heightened scrutiny regarding credit card lending practices, high and/or unnecessary fees, and customer disclosures.
Seattle-based WaMu's managed net losses for the credit card portfolio rose more than 200 basis points to 9.32% in the first quarter, compared to 6.90% at the end of last year. WaMu paid $6.1 billion for credit card issuer, Providian Financial, in 2005.
We are seeing some stress
in the card portfolio in certain parts of the country where there is a significant downturn in housing prices and higher mortgage delinquencies," WaMu's president Stephen Rotella said during an earnings call last month. "We were seeing that starting late last year and in fact, we took a number of actions both on new loans coming in and on credit line increases and in fact, freezing them which is why our receivables are down in the first quarter."
Rotella estimated card losses in the range of 9.5% to 10.5% for the year - based on an unemployment rate of 6%.
"Clearly this portfolio, like most credit card portfolios, has a pretty strong correlation to unemployment, so if we were to see the general economy slip in to a higher level of unemployment, we might expect those losses to increase above that level," he said.
Capital One, based in McLean, Va., expects U.S. card charge-offs in the range of 6% through the end of September and higher in the fourth quarter, it said last month during earnings. The company said that it is pulling back on loan growth as industry trends and economic indicators weaken.
While an extended recession will put a damper on just about any consumer-related company, electronic payment processors such as
are in good positions. That's because the companies take in fees per card transaction and don't hold loans on their books like the banks or other card companies like
. The firms are also expanding their businesses outside of the U.S., which for the most part are still cash and check societies.
Consumers having trouble accessing cash through home equity lines as the credit crisis continues will be more apt to finance the purchases through their credit cards, analysts say.
Visa has acknowledged that its U.S. credit card business has slowed somewhat, but that the company's international and debit card businesses largely offsets the decline. The company has "a pretty high degree of resiliency," CEO Joseph Saunders said on Wednesday at the UBS conference. "When the economy weakens, as it has, we won't fall off a cliff - not even a little ledge."