The recent run-up in credit card delinquencies has been concentrated in relatively few banks and does not foreshadow an industrywide profit collapse, a new study concludes.
Veribanc Inc., a Wakefield, Mass., banking research firm, said that at the end of 1995, one-third of delinquent card debt was held at just 25 banks. These issuers control only one-fifth of card balances outstanding.
Delinquency rates - the proportion of loans at least 30 days past due - have been on the rise for the past year. The American Bankers Association reported that credit cards at yearend matched their worst level of the past 10 years, with 3.34% of loan accounts delinquent.
But the problem is "isolated to a relatively small number of borrowers that can't handle the card, and a relatively small number of banks that can't handle the borrowers," said Warren Heller, Veribanc research director.
Associates National Bank of Wilmington, Del., part of Ford Motor Co.'s Associates Corporation of North America, had the highest delinquency rate - 5.66% of $238 million in outstandings.
An industry expert described Associates as "probably the best financial institution in the country at making money off high-risk customers," which might explain a willingness to live with higher-than-average delinquency.
Included in the top 10 were a number of private-label credit specialists including First Consumers National Bank, Beaverton, Ore., which issues the Spiegel card; Dillard National Bank, Phoenix, an affiliate of the Dillard's retailing chain; and World Financial Network National Bank, Whitehall, Ohio, the bank serving the Limited clothing chain and affiliated stores.
"Private-label cards typically show higher loss and delinquency numbers," said Susan Roth, analyst with Bear, Stearns & Co. Retailers generally distribute cards widely, lowering credit standards in the interest of encouraging broad customer loyalty.
Department stores and speciality stores also tend to charge higher interest rates than banks, said Ralph Spurgin, president of World Financial Network. And on average, consumer balances are $200 on private label cards, compared to $2,000 on bank cards.
Focused on increasing store sales, private-label issuers "can afford to take higher risks, which causes higher delinquency," Mr. Spurgin said.
Veribanc analyzed bank call reports from Dec. 31 and earlier and found that problem loans across the industry have declined in most states. Mr. Heller said, however, that Veribanc had determined the delinquency problem to be industry-specific, not regional.
"I would assume we'd see a concentration," Ms. Roth said. "The reality is not everyone (among issuers) is as good" at managing credit.
Veribanc studied delinquency statistics at all credit card banks with at least $50 million of outstandings.
"There appeared to be minimal correlation with other types of consumer debt delinquencies," Mr. Heller said. "This is a much narrower problem than we expected to find."
Veribanc set out to quantify the credit card consumers' problems. "We came to the conclusion that most families are not having problems," Mr. Heller said. "It's just card industry specific, and it's the part of the banking industry that's been having the toughest time with their programs.
"We're talking about a management problem," Mr. Heller added. "Nobody likes to be running programs that are less profitable than they should be."
Veribanc concluded that other consumer borrowing sectors are experiencing only modest spillover from the credit card delinquencies.
