Bank Bulls Bet on Credit Card Trends

The recent performance of major lenders' credit-card portfolios bodes well for their stocks -- if one ignores the risks associated with financial reform and populist rage.
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) -- If you want to know where consumer-oriented bank stocks are headed, it's worth taking a look at their monthly credit-card statistics.

The most recent trove of plastic data came out on Tuesday and suggests that some of the biggest consumer banking names may be underpriced. Among the bullish signals: Losses were down for the second month in a row, there were fewer delinquencies and balances continued to decline -- showing that banks are derisking by writing off bad credit-card debt, that consumers are paying off their debts, or some combination of the two.

The trends were evident at six firms that are highly exposed to credit-card debt:

Bank of America

(BAC) - Get Report


JPMorgan Chase

(JPM) - Get Report



(C) - Get Report


Capital One

(COF) - Get Report


American Express

(AXP) - Get Report



(DFS) - Get Report

. Their $335 billion worth of credit-card receivables held at the end of April had declined 1% from the previous month, and 9.1% over the past year. Losses were still elevated -- with an average charge-off rate of 9.65% -- but better than the nearly 10% level in March. Delinquencies dropped to 5.17% from 5.39%, on average.

"April results were broadly positive," said Collins Stewart analyst Todd Hagerman, though he warned that "material improvement will be slow to emerge."

Sandler O'Neill's Jeff Harte said the reports showed "continued credit improvement." While Bank of America and Citi's losses tracked higher than Harte expected, he said their delinquency trends -- which portend future losses -- provided "a meaningful offset."

Credit cards represent one of the riskiest types of loans a bank can offer -- and not just because they're unsecured.

Consumers tend to rely heavily upon credit cards in times of financial stress -- in other words, now -- but they also tend to prioritize payments behind mortgages, car loans and ordinary utility or phone bills. It's a lose-lose situation of sorts, because rates and penalties can then climb higher, making the debt more burdensome on the consumer, and less likely to be paid back to the bank.

But over the past few months, things have finally started getting better. Susan Faulkner, head of Bank of America's credit card business, said recently that the peak in losses came in the third quarter, and that metrics have been steadily improving since then.

"There's still some high losses," she acknowledged on a May 10 conference call. "But all of the indications, whether we look at our early entry rates, and the delinquencies, charge offs, everything continues to look at positive trends."

Additionally, all the major lenders have outlined how two major bills that already passed -- Reg E and the CARD Act -- will

impact top-line results: Roughly $500 million apiece on an annual basis. While that's nothing to sneeze at, the market is already aware of the implications. Lenders are working to make up for the lost revenue by tacking fees onto other items or boosting business elsewhere.

At least one hedge-fund manager who's bullish on financials has taken note.

Michael Corcelli, a managing partner of Alexander Alternative Capital, says the master-trust data has the ability to move stocks like Capital One because it shows that consumer-weighted banks are coming out of the woods on the most worrisome type of debt.

"This is a huge positive for companies like Capital One, American Express, Discover and all the banks that issue credit -- all big ones," Corcelli said after the March data were released. "That is what is driving the prices of companies like Citi, JPMorgan, Capital One."

Of course, since those data were unveiled on April 15, other issues have come to the fore: Scary provisions in the financial reform bill that threaten to crimp profits, the government crackdown on

Goldman Sachs

(GS) - Get Report

, the flash crash on May 6 that no one seems to understand, which inexplicably sent the

Dow Jones Industrial Average

spiraling down 1,000 points.

As a result, bank stocks have been weighed down, especially huge, money-center banks like Citi, JPMorgan and Bank of America. The six big card lenders are down an average of 14% since March data were unveiled, whereas the KBW Bank Index is down a more reasonable 7%, and the Dow has shed just 4.5%. Whether that's a buying opportunity or a warning sign of what's ahead depends on whether you put more weight in economic improvements or in the risks associated with financial reform and populist rage.

For those betting on fundamentals alone, the master-trust data are encouraging. It shows that the banking industry and the consumer have begun to repair - the first step toward a return to growth.

"The roughly $335 billion in outstanding receivables serves as a useful barometer to gauge future card losses in each company's held portfolios as well as overall consumer credit performance," Hagerman said in a recent report.

Or, as Corcelli puts it: "This is a positive sign and a sign that refutes all the bears out there."

-- Written by Lauren Tara LaCapra in New York