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Card Outlook Positive for Big Issuers

Improvements in the credit card industry loss and delinquency rates will be a major driver for second-half earnings.



) -- The improvement in credit card delinquency and loss rates for July bodes well for the economy and looks to be a major driver of earnings improvements among the six key domestic card lenders.

Credit Card Loss Rates

According to data from monthly 10-D filings of credit card master trusts provided by

SNL Financial

, the largest six credit card lenders - by total balance sheet and managed card portfolios - all saw month-over-month improvements in credit card loss rates, and all improved form a year earlier, except for

JPMorgan Chase

(JPM) - Get JP Morgan Chase & Co. Report


While JPMorgan Chase's 7.95% loss rate in July was slightly higher year-over-year, it was the third best among the group, after

Discover Financial

(DFS) - Get Discover Financial Services Report

which had the lowest loss rate of 7.28% and

Capital One

(COF) - Get Capital One Financial Corporation Report

, which had a credit card loss rate of 7.43%.

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was the only one of the six that saw an increase in its loss rate from May to June, but also had the greatest month-over-month improvement in July, when its loss rate declined to 9.10%.

Bank of America

(BAC) - Get Bank of America Corporation Report

had the highest credit card loss rate over the past year, although its July rate of 11.39% was a vast improvement from the peak loss rate of 14.54% in August 2009.

American Express

(AXP) - Get American Express Company Report

continued to have the lowest loss rate among the group, at 5.43% for July.

Credit Delinquency Rates

Here are the 30+ days delinquency rates for the six largest domestic credit card lenders, with the data again coming from monthly 10-D filings of credit card master trusts provided by SNL Financial:

The group average 30+ days delinquency rate of 4.64% was the lowest since SNL began compiling this data in January 2009.

Rochdale Securities analyst Richard Bove said that while lenders' early efforts to restrict credit for their riskiest customers and eliminate "access to the cash machine," along with pricing increases springing from the Credit Card Accountability Responsibility and Disclosure Act of 2009 have fed improvements, "the consumers are stabilizing their balance sheets on their own."

With household debt having declined during seven of the last eight reported quarters, and with a stronger base of credit card borrowers, Bove thinks the industry's outlook is bright, despite Thursday's lousy unemployment numbers.

Mark Tepper, the president of Strategic Wealth Partners in Seven Hills, Ohio, agreed that credit card loss and delinquency rates were bound to continue improving, saying "any excess income people have is going toward paying down that credit card debt," but adding that the lack of discretionary income available for purchases would hurt retailers, hotels, restaurants, etc.

"We're considering shorting the consumer discretionary sector, he said."

Bank of America

Bank of America reported total assets of $117 billion in its Global Card Services segment as of June 30, or 8% of total assets. More importantly, the card segment contributed 23% of the company's total revenue during the second quarter and $1.3 billion or 31% of its net income before taxes. That is a key number, showing how continued improvement in credit card underwriting and servicing can drive Bank of America's earnings.

During 2009, although Bank of America managed to earn $5.6 billion before taxes, Global Card Services losses of $8.3 billion were offset by $14.8 billion from the Global Banking and Markets division and $3.8 billion in Wealth Management, reflecting trading profits, investment income, investment banking and service fees from the addition of Merrill Lynch. Going back to 2007, the credit card segment earned $6.7 billion before taxes, out of a total NIBT of $22.6 billion.

With Bank of America now achieving a decent profit on its card business despite having the worst loss rate among the big six, it's fair to say that a big part of the second-half story for the company will be a growing contribution to the bottom line from this segment as the loss rate continues to decline.

Bove said he had come away from a Wednesday discussion with Bank of America believing the company's credit card "pricing is going to get a lot sharper at this company a lot sooner," adding that he believes the U.S. economy is not heading for a double-dip recession. "So I think the outlook for BAC's credit card business is pretty good right now," he said.


Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.