Call it cash-back rewards for credit card lenders.
Reserve releases have been padding bottom lines at banks for more than a year, and the rapid recovery in card loan performance is behind much of the phenomenon.
At JPMorgan Chase & Co., the annual pace of chargeoffs has fallen by more than half from the first quarter of 2010 to about $9 billion in the first quarter this year. Concurrently, the company stepped up reductions in its allowance for losses on card accounts, releasing $1 billion in the first quarter of 2010, $2 billion in the fourth quarter and another $2 billion in the first quarter this year (see charts).
Over the entire period, the credit card business accounted for more than 80% of reserve releases at JPMorgan Chase.
Reductions in Bank of America Corp.'s allowance for credit card losses have been comparatively uneven, but the overall picture is similar. In fact, were it not for about $9 billion of card allowance releases over the period, the company's reserves would have increased.
Unsecured credit typically accounts for a large proportion of reserves, so it makes sense that card units are a principal source of relief as defaults ease. (Cards represented roughly one third of total loss allowances at JPMorgan Chase and B of A in the first quarter.)
Continuing improvements in card credit performance suggest the businesses have more to give.
The chargeoff rate for JPMorgan Chase accounts backing bonds fell 43 basis points from the first quarter to an average of 5.64% in April and May. The company has predicted that the chargeoff rate for its entire portfolio, excluding commercial accounts and receivables from its acquisition of the banking operations of Washington Mutual Inc., could fall from 6.1% in the first quarter to about 5.5% in the middle of next year.
For securitized card receivables at B of A, the chargeoff rate fell 60 basis points from the first quarter to an average of 8.14% in April and May.
"You have got to be careful" with reserve releases, Brian Moynihan, the company's chief executive, said in a presentation in June, but improvement in credit quality "has a lot of room to go for us."
