Credit Commentary

Credit Card losses remain elevated in Jan’10

By Zarana on Wednesday, February 17 2010

The latest numbers on the performance of credit-card loans, from issuers including Capital One Financial Corp. (COF), Discover Financial Services (DFS), J.P. Morgan Chase & Co. (JPM) and Bank of America Corp. (BAC), indicate that consumers remain stressed by high rates of joblessness. Losses stemming from souring credit-card loans remain elevated.

Issuers of credit cards--including Citigroup Inc. (C) and American Express Co. (AXP)--are also coping with sweeping legislation restricting certain fees and rate increases, which will bite into income. Bank of America saw a decline in both net charge-offs and delinquency rates, a measure used by credit card companies to predict future customer defaults.

Credit card charge-offs at Capital One rose to 10.41% in January from 10.14% in December. Borrowers at least a month behind (30+ day DQ) on their credit-card payments rose to 5.80% in January from 5.78% in December.

Discover said charge-offs in January totaled 8.58% of credit-card loans that have been packaged into bonds, down from 8.68% in December. The 30+ day delinquency rate rose to 5.55% from 5.49% in December. Discover and its bigger rival, American Express, both issue credit cards and process transactions

On the contrary to the industry trends, American Express continued its streak of reporting relatively healthier credit trends. The 30+ day delinquency rate declined modestly, to 3.6% in January from 3.7% in December. In addition, AmEx wrote off 7% of its card loans last month, compared to 7.1% in December.

In line with the historical trend Bank of America, at 13.25%, had the highest write-off rate in January among credit-card issuers who have reported so far. However, write-off was lower than the 13.53% it reported in December. The company has had the highest write-off rate among its peers since July. Again the biggest U.S. lender said late payments on credit-card loans fell to 7.35% in January, the lowest in a year.

J.P. Morgan Chase said it wrote off 10.91% of credit-card loans last month, up from 7.11% in December. While the 30+ delinquency rate inched down to 4.75% in January from 4.95% in December. In addition, Citigroup wrote off 9.8% of card loans in January, up from 9.56% in December.

While retail sales showed mild improvement last month, January's performance in credit card portfolios was a reminder that the economic recovery remains sluggish. In addition, the analyst foresees higher delinquencies in coming months and to peak by Q2’10. While the volume of charge-offs may peak in coming months, levels in January remain high, suggesting the road to economic recovery in the U.S. would not be a smooth ride.