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:
Third-quarter profits jumped 71% because cardholders spent 14% more than an year ago. Overdue payments continue to fall, so American Express can cut themoney 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
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.
Bank of America continues to have the highest charge-off rate. Charge-offs dropped from 11.73% in August to 9.99% in September.
Delinquencies dropped from 5.71% in August to 5.68% in September.
Net income more than doubled, to $803 million from $394 million a year ago.The company said in a statement that "continued improvement in credit loss and delinquency performance in the portfolio was the primary driver of the third-quarter allowance release."
Charge-offs increased from 8.19% in August to 8.38% in September.
The delinquency rate dropped from 4.56% in August to 4.53% in September.
Citi reported earnings of $2.2 billion during the third quarter as loan losses continue to decline. Citi's losses from bad loans fell 30% during the third quarter, to $7.66 billion.
Charge-offs dropped from 11.18% in August to 8.99% in September.
Delinquencies dropped from 4.95% in August to 4.93% in September
J.P. Morgan Chase reported that third-quarter earnings rose 23%, to $4.4 billion, as it significantly lowered reserves against loan losses. The credit card division posted a $735 million profit.
Charge-offs fell from 8.18% in August to 7.78% in September.
Delinquencies fell from 3.89% in August to 3.82% in September.
Discover Financial Services
Discover recorded a third-quarter profit of $261 million. This was below the third quarter of last year, though, when it made a profit of $577 million. Discover said card sales volume rose 5%, to $24 billion, from increases in average card member spending and merchant acceptance of Discover cards. Credit card loans totaled $45.2 billion, down $2.9 billion from the prior year's quarter, driven by a reduction in promotional rate balances and an increase in the payment rate.
Charge-offs decreased from 7.98% in August to 7.15% in September.
The delinquency rate fell from 4.47% in August to 4.41% in September.
-- Reported by Bill Hardekopf of LowCards.com.
Bill Hardekopf is chief executive of
, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."