Credit Commentary

Delinquency and Defaults on a peak across the Credit Card Industry

By Zarana on Wednesday, July 22 2009

U.S. credit card companies said defaults and delinquencies were lower in June, an encouraging sign that borrowers are not in as bad shape as many analysts had feared. With American Express Co and Bank of America projecting better business in the second quarter of the year than forecasted,  the credit card industry portrays a glimmering picture in the weak economy.
American Express posted its first decline in chargeoffs  while JPMorgan Chase & Co, Citibank and Alliance Data Systems also surprised analysts with fewer defaults for the first time since October. Additionally, accounts at least 30 days delinquency rate,  fell in June across the industry, with American Express and Capital One Financial Corp posting their fourth-straight monthly declines. The reports may signal that American consumers' credit positions are not deteriorating as rapidly as feared, despite rising unemployment and the continuing housing slump.
American Express, the largest U.S. credit card company by sales volume, reported 24 bps drop in the default rate for securitized loans in June.  It was its first monthly decline in a year. On the other hand, the managed defaults rate rose to 10% in the second quarter from 8.5% in the first quarter, but were below its estimated range of 10.5 to 11.0%.
JPMorgan & Chase, the largest issuer of Visa credit cards, reported that master trust defaults declined to 9.4% percent in June from 10% percent in May, a 62 bps decline. While the managed default rate soared up to 10% in the second quarter from 7.7% in the first quarter. In addition to the high default rate, the 30-day managed delinquency rate was 5.86%, up from 3.46% in the prior year and down from 6.16% in the prior quarter, reflecting normal seasonal patterning.
Citigroup,  the largest issuer of MasterCard branded cards,  said master trust defaults were almost unchanged at 10.5%, while Capital One's chargeoff rate rose less than expected to 11% from 10.2%
Overall, delinquencies and chargeoffs were a little bit better than expected, reflecting maybe stabilization in some of these trends and some seasonal effects as consumers used tax refunds to pay off debts.
But other data showed consumers remain under pressure. Bank of America Corp, the largest U.S. bank, said on Wednesday its trust default rate rose to 12.6%  in June from 11.2% in May, an 142 bps spike. Secondly, Managed Net charge off rate for Credit Cards is all time high at 11.7% in this quarter, up from 8.6% in prior quarter. However, the delinquency (over 30 days) has decreased from prior quarter due to seasonal factors and dropped to 7.64%
The bank is paying a price for its rapid expansion in recent years and has one of the highest concentrations of sub prime borrowers among the top card issuers, analysts said. It also has a large exposure in California and Florida, two of the states hit hardest by the housing crisis and high unemployment. And credit card chargeoffs remain on track to reach record highs before peaking around at the end of 2009 or in early 2010.
Credit card defaults usually track unemployment, which rose in June to a 26-year high of 9.5% and is expected to peak at more than 10 percent by year-end.
Analysts expect credit card default rates to peak at between 12% and 14% between the end of 2009 and early 2010, with losses topping $100 billion. They do not expect the credit card industry to be profitable until 2011.
Credit card lenders are trying to protect themselves by tightening credit limits, raising standards and closing inactive accounts. They have also been slashing rewards, increasing interest rates and boosting fees to cushion against further losses. Companies are accelerating interest rate and fee increases ahead of a law, due to take effect in February 2010, that will limit their ability to impose such increases.