NEW YORK — The new CARD Act aimed at cracking down on many pricing practices on credit cards, could indirectly benefit many issuers when the economy recovers, according to several analysts.
Many large issuers have already switched cardholders from fixed to floating rates as a preemptive strike. But the defensive moves could put card industry profits on a springboard when credit losses subside, analysts told American Banker, an affiliate of Credit Union Journal.
"You may have a phenomenon where in good times, the card issuers overearn … and in bad times underearn" because of restrictions on their ability to increase prices, said Sanjay Sakhrani, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc.
"They've basically repriced their assets higher to compensate themselves for the reduced flexibility they have in bad times," he said. "However, if we're going into a period of good times, you wouldn't necessarily need that flexibility."
Scott Valentin, an analyst with Friedman, Billings, Ramsey & Co. Inc., told American Banker that the credit card industry could be headed toward a strong recovery. "The industry has become more pro-cyclical because of the" legislation, he said. With the pricing restrictions that are due to take effect, lenders "price a rate where over the cycle the account is profitable. So, when losses are very low, the margins should be very high."
Historically, issuers' net interest margins would shrink when credit expenses fell, Sakhrani said. Gains in employment made it easier for people to pay their bills, but pricing on credit cards had trouble keeping up with rising interest rates as the economy strengthened.
Cynthia Ullrich, a senior director for U.S. consumer asset-backed securities ratings at Fitch Inc., said that in the past, a lag in price increases on fixed-rate accounts has been evident in pressured spreads when rates rise rapidly. "Usually, it's when there's a rate adjustment that's pretty large," like a couple of 50 basis point increases in the prime rate over a few months, she said.
But this time around, some analysts contend, credit card pricing will have an easier time keeping up because of the move to floating rates. So margin compression is less likely to offset the decline in chargeoffs that usually accompanies an economic recovery.
