Some Wall Street analysts are growing more worried about the impact of rising credit card losses on bank earnings and stock prices.
Their concerns heighten the effect of news this week from the American Bankers Association that card account delinquencies reached a 15-year high in the first quarter.
"The glamour era in credit cards is over," said George M. Salem of Gerard Klauer Mattison & Co., New York. He said slower growth and increased losses soon will cut the once-dazzling returns from cards to the levels of banks' other lines of business.
Indeed, Mr. Salem in a new report terms credit cards "the number-one risk in banking." He blames escalating losses on overlending after billions of direct-mail solicitations were sent to customers over the past three years.
Also concerned are analysts at Montgomery Securities, San Francisco. They noted in a new report that consumer loan losses, including credit cards, now account for 71% of banks' total loan losses, up from 27% four years ago.
If card sector conditions get difficult, New York's Citicorp and First Chicago NBD Corp. are the most vulnerable banks, in Montgomery's view. Mr. Salem puts First Chicago NBD and Banc One in that category. Speciality card issuers also are susceptible, he added.
The Montgomery analysts said they expect growth in losses to be manageable, because banks have strong balance sheets. On the other hand, unlike more optimistic forecasters, they do not expect losses to peak until sometime next year.
Forecasting a peak in write-offs will be difficult, Mr. Salem said, because "this era of rising card losses marks a fundamental departure from prior eras."
The big differences, he said, are the proliferation of cards issued, the apparent willingness of consumers to assume more credit than incomes can service, and escalating personal bankruptcies.
Over the last two full years, 1994 and 1995, five billion card solicitations were mailed, Mr. Salem noted in his study. That amounts to 32 solicitations for each person between ages 18 and 64, offering them lines of credit totaling $130,000 on average.
"Card issuance has taken on the character of mass-mailed advertising," Mr. Salem said.
The mailings often have targeted less creditworthy groups of borrowers, including college students, and underwriting standards have not been strong, Mr. Salem said.
Data released this week by the Federal Reserve showed that credit card debt rose at a 20% annual rate in April.
"We are growing card debt three times faster than incomes. Things have to be getting riskier," said Gary Gordon, an analyst at PaineWebber Inc.
Mr. Salem disputed the notion that savvy card issuers will not be hurt by losses.
"While there were many sophisticated, technology-driven approaches to choosing potential cardholders, we believe the competitive situation, overcapacity, and drive for business led most issuers into very aggressive loan underwriting practices."
He also said he did not think card underwriting sophistication varies markedly among the largest issuers.
Citicorp ranks as most vulnerable, because it is the nation's largest issuer and derives a large part of its revenues from cards. The Montgomery analysts estimated the card business accounts for 29% of net income at Citicorp, 25% at First Chicago NBD and less than 20% at Wachovia and Banc One.
Had card losses been 100 basis points higher in the first quarter, Montgomery estimated Citicorp earnings per share would have been cut by 10.2%, First Chicago NBD's by 8%, Banc One's by 5.4% and Wachovia's by 4.8%
Montgomery has not changed 1996 or 1997 earnings estimates for these banks. But analysts there cautioned that investors are "appropriately focused on increases in consumer loan losses."
Mr. Salem is also taking a wait-and-see approach on the banks he follows.
