Serious loan delinquencies at 48 specialized credit card issuers are dragging down the entire industry, yearend 1996 data from Veribanc Inc. indicate.
If not for those companies that make at least 90% of their loans to credit card customers, the card industry's serious delinquencies-accounts at least 90 days past due-would be in line with other types of consumer lending.
But the concentrated credit card lenders cited by Veribanc have big market shares and high profiles. They include three of the big four monoline companies-Advanta, Capital One, and First USA- as well as units of American Express Co., Dean Witter, Discover & Co., Dillard Department Stores, Household International Inc., General Electric Co., Sears Roebuck and Co., and Travelers Group.
The 48 lending entities associated with such organizations accounted for 54% of credit card debt but 78% of serious delinquencies, which amounted to $4.6 billion on Dec. 31, or 1.92% of total outstandings.
The serious delinquency ratio was up from 1.61% a year earlier and 1.83% in the third quarter. The trend parallels that in the American Bankers Association's conventional delinquency measure of accounts at least 30 days past due, which rose during last year to 3.72% from 3.34%.
As a percentage of dollars loaned, the basis used by Veribanc in its analysis of bank call reports, the ABA 30-day indicator rose a full percentage point last year, to 5.45%.
Veribanc's 1996 serious delinquency ratio for the 48 monolines and other specialists was 2.78%, 1.45 times the industry average.
"If the 48 banks associated with the specialty groups are considered separately from the other 5,906 banks in the industry that offer credit cards, the remainder of the industry's serious card delinquency rate is 0.91%," said a report by Veribanc.
Serious delinquencies in noncredit-card consumer debt stood at 0.92%, down from 0.96% in 1995, despite increasing from $3.2 million to $3.3 million. Serious home equity delinquencies are at about half those ratios.
Focusing on just the 157 banks that have at least $100 million of outstanding card debt and comprise 96% of the industry, the Wakefield, Mass., research firm said those 48 specialists accounted for 63% of serious delinquencies and had an aggregate ratio of 2.22%, one-sixth worse than the norm.
"Examination of the group indicates 23 of the monoline banks have credit card portfolios with serious delinquency rates in excess of the national average," Veribanc said.
Some issuers are "buying risky portfolios, making acquisitions by doing promotions, and looking for grade B and grade C credit," said Veribanc research director Warren Heller. "They are living off increased fee income as well as the interest income."
Veribanc's survey of call report data for 10,120 banks showed that net chargeoffs rose in 1996 to $9.64 billion from $6.84 billion. Chargeoffs as a percentage of average credit card loans outstanding increased to 4.37% from 3.39% in 1995 and 2.99% in 1994.
The 8.2% growth in bank card debt last year, to $238 billion, was well below the spurts of 15.9% in 1995 and 21.8% in 1994. Cardholder credit limits likewise slowed their growth to 20.9% last year from 30.9% in 1995 and 28.9% in 1994.
"Industry efforts to rein in the growing delinquency and chargeoff rates are beginning to take effect," Veribanc concluded.
"Delinquencies have got to the upper limits of what most companies consider acceptable from a risk management standpoint," said Mr. Heller.
Stanley Anderson, president, Anderson and Associates, Arvada, Colorado, said the situation at Advanta is evidence of lenient credit criteria.
As a result of the delinquencies, "you may see consolidation in the industry and some credit card portfolios might fold,"he said, "But any premium for the portfolios will be modest," he added.
While the rate of increase in serious delinquencies slowed last year to 19.3% from 29.8%, Mr. Heller said they had not yet reflected the control mechanisms like tightened credit standards that banks have implemented.
"A little over half of the loan officers at large banks currently say they are tightening credit standards," said David A. Wyss, research director and financial economist for DRI/McGraw-Hill in Lexington, Mass. "That's a start, but that means half aren't."
Based on the Federal Reserve Survey of Consumer Finances published in February, Mr. Wyss said, households with incomes under $25,000 a year are taking on a disproportionate share of the nation's credit card debt.
"In 1993 and 1994, the profit margins of credit cards attracted a lot of people into the business and forced banks to be more aggressive in issuing credit cards," said Mr. Wyss.
The profit yield on credit cards has fallen from about 4% to 2.7%, while the rest of bank businesses increased from 1.8% to 2.1%, the economist added.
Sung Won Sohn, chief economist of Norwest Corp., Minneapolis, disagreed. He said households between $25,000 and $100,000 in annual income are the ones getting into trouble.
"Statistics show that 50% of cardholders now use their credit cards for convenience, as opposed to 30% to 40% in 1989," said Dr. Sohn. "Their intentions are good, but a lot of them are getting into trouble."
Mr. Sohn also pointed to the disparity between commercial banks and credit card specialists in offering credit.
"Commercial banks cross-sell and are aware of their customers' financial positions, " said Mr. Sohn. "Card specialists do mass mailing and rely more on credit scoring systems."
Mr. Sohn said both lenders and borrowers are being more cautious but he expects delinquencies to go up in coming months as the economy slows and interest rates rise.
"The basic problem for banks is that they forgot the first law of banking-never lend money to anyone that needs it-and now they are paying for it," said Mr Wyss.
"But now they are learning the second law of banking, which is that banks don't make money by lending, banks make money by getting paid back."
