Late Credit-Card Payments Stoke Fears For Banks
Average net charge-off rate for large U.S. card issuers increased to 3.29% in the second quarter, its highest level in four years.
By AnnaMaria Andriotis
The Wall Street Journal
August 1, 2017
Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy.
The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers, including J.P. Morgan Chase & Co., Citigroup Inc., C 1.51% Capital One Financial Corp. COF 1.42%and Discover Financial Services , DFS 1.13% had increases for the quarter.
The trend, which accelerated in the first half of this year, has started to suppress bank earnings. If consumers’ budgets get more stretched, a pullback in spending could pressure both growth and corporate profits.
While losses are rising, they remain low compared with historical levels and the 10% net charge-off rate they hit in early 2010. Lenders say they aren’t expecting a return to crisis-level losses and the increases are largely a return to normal after a period of abnormal lows.
Still, other bankers have noted the change in direction, a new string of losses in the industry after 24 quarters in which they fell. “The overall environment is deteriorating,” said David Nelms, chief executive at Discover in an interview. It is “not quite as favorable as it was over the past few years.”
In 2010, when credit card write-offs started declining, banks lent mostly to creditworthy borrowers. But starting around 2014 many lenders loosened underwriting standards substantially, turning to subprime borrowers with lower credit scores that brought in higher yields.
That contributed to a new boom in credit-card spending. Card balances nationwide rose 6% over the last 12 months through May, a growth rate that is up from about 1% four years ago, according to the Federal Reserve.
Rising balances, however, have also coincided with the recent loan losses and, analysts note, put a dent in what has been one of the healthiest credit-card markets on record.
The missed payments and increase in losses are having knock-on effects on lenders’ earnings. Many posted double-digit percent year-over-year increases in the money they set aside to cover future card losses.
Discover shares dropped 4% on Thursday, the day after the company reported that it increased loan-loss provisions by 55% and raised guidance for its 2017 overall net charge-off rate. It is “hard in the short term to grow earnings when credit is moving against us,” Mr. Nelms said.
The rising losses are occurring during a time of near record-low U.S. unemployment, which suggests that credit performance could quickly weaken should the jobs situation turn. “That’s a little concerning,” said Michael Taiano, a director at Fitch.
During the first-quarter earnings period, some lenders and analysts pointed to delays in tax refunds as a possible reason for the pickup in card-related losses. But this quarter, charge-offs kept rising for many lenders, giving more credence to worries that consumers are taking on too much debt.
The card market is an indicator of consumers’ ability to pay back their debts. Unlike mortgages, a much broader group of consumers have access to cards. And these accounts can fall low on the priority list of bill payments when household finances get tight.
While overall consumer balance sheets look healthy, according to Federal Reserve data, some numbers suggest they are starting to stretch. Balances are growing faster than purchases charged to retail-store cards from Synchrony Financial and Citigroup Inc.
Card losses in the U.S. are up at most big banks, including those that specialize in subprime lending or store credit cards. The net charge-off rate at Capital One in the second quarter increased more than a percentage point from the year prior. Citigroup’s store card figure increased 0.63 percentage point, while Synchrony’s overall rate rose more than 0.90 percentage point.
Broader consumer figures also point to overleveraging. Non-mortgage consumer debt payments, including credit cards and auto loans, account for the largest share of consumers’ after-tax income since 2009, according to an analysis by Barclays PLC.
So far this year, several card lenders, including Capital One Financial Corp. and Synchrony, have raised projections for charge-offs. Investors are jittery about more revisions.
Alliance Data Systems Corp. , the third-largest issuer of store cards by outstanding balances, had been guiding investors to a full-year 2017 loss rate in the mid-5% range. In July though, it wouldn’t commit to that figure when pressed by analysts on its earnings call. The company also reported a net charge-off rate for cards of 6.2% for the second quarter, up 1.1 percentage points from a year earlier. Its shares plummeted more than 9% that day.
Credit cards also moved to the top of the list of concerns about potential losses in the Fed’s annual stress test of banks in June. It said banks would incur $100 billion in projected credit-card losses in a severely adverse hypothetical recession, tied with commercial and industrial loans. Cards ranked third the year prior.
“We’ve seen an inflection point in credit,” said Charles Peabody, managing director at Compass Point Research & Trading LLC. “It is going to get worse from here.”
Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy.
The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers, including J.P. Morgan Chase & Co., Citigroup Inc., C 1.51% Capital One Financial Corp. COF 1.42%and Discover Financial Services , DFS 1.13% had increases for the quarter.
The trend, which accelerated in the first half of this year, has started to suppress bank earnings. If consumers’ budgets get more stretched, a pullback in spending could pressure both growth and corporate profits.
While losses are rising, they remain low compared with historical levels and the 10% net charge-off rate they hit in early 2010. Lenders say they aren’t expecting a return to crisis-level losses and the increases are largely a return to normal after a period of abnormal lows.
Still, other bankers have noted the change in direction, a new string of losses in the industry after 24 quarters in which they fell. “The overall environment is deteriorating,” said David Nelms, chief executive at Discover in an interview. It is “not quite as favorable as it was over the past few years.”
In 2010, when credit card write-offs started declining, banks lent mostly to creditworthy borrowers. But starting around 2014 many lenders loosened underwriting standards substantially, turning to subprime borrowers with lower credit scores that brought in higher yields.
That contributed to a new boom in credit-card spending. Card balances nationwide rose 6% over the last 12 months through May, a growth rate that is up from about 1% four years ago, according to the Federal Reserve.
Rising balances, however, have also coincided with the recent loan losses and, analysts note, put a dent in what has been one of the healthiest credit-card markets on record.
The missed payments and increase in losses are having knock-on effects on lenders’ earnings. Many posted double-digit percent year-over-year increases in the money they set aside to cover future card losses.
Discover shares dropped 4% on Thursday, the day after the company reported that it increased loan-loss provisions by 55% and raised guidance for its 2017 overall net charge-off rate. It is “hard in the short term to grow earnings when credit is moving against us,” Mr. Nelms said.
The rising losses are occurring during a time of near record-low U.S. unemployment, which suggests that credit performance could quickly weaken should the jobs situation turn. “That’s a little concerning,” said Michael Taiano, a director at Fitch.
During the first-quarter earnings period, some lenders and analysts pointed to delays in tax refunds as a possible reason for the pickup in card-related losses. But this quarter, charge-offs kept rising for many lenders, giving more credence to worries that consumers are taking on too much debt.
The card market is an indicator of consumers’ ability to pay back their debts. Unlike mortgages, a much broader group of consumers have access to cards. And these accounts can fall low on the priority list of bill payments when household finances get tight.
While overall consumer balance sheets look healthy, according to Federal Reserve data, some numbers suggest they are starting to stretch. Balances are growing faster than purchases charged to retail-store cards from Synchrony Financial and Citigroup Inc.
Card losses in the U.S. are up at most big banks, including those that specialize in subprime lending or store credit cards. The net charge-off rate at Capital One in the second quarter increased more than a percentage point from the year prior. Citigroup’s store card figure increased 0.63 percentage point, while Synchrony’s overall rate rose more than 0.90 percentage point.
Broader consumer figures also point to overleveraging. Non-mortgage consumer debt payments, including credit cards and auto loans, account for the largest share of consumers’ after-tax income since 2009, according to an analysis by Barclays PLC.
So far this year, several card lenders, including Capital One Financial Corp. and Synchrony, have raised projections for charge-offs. Investors are jittery about more revisions.
Alliance Data Systems Corp. , the third-largest issuer of store cards by outstanding balances, had been guiding investors to a full-year 2017 loss rate in the mid-5% range. In July though, it wouldn’t commit to that figure when pressed by analysts on its earnings call. The company also reported a net charge-off rate for cards of 6.2% for the second quarter, up 1.1 percentage points from a year earlier. Its shares plummeted more than 9% that day.
Credit cards also moved to the top of the list of concerns about potential losses in the Fed’s annual stress test of banks in June. It said banks would incur $100 billion in projected credit-card losses in a severely adverse hypothetical recession, tied with commercial and industrial loans. Cards ranked third the year prior.
“We’ve seen an inflection point in credit,” said Charles Peabody, managing director at Compass Point Research & Trading LLC. “It is going to get worse from here.”
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