As Clouds Gather, Card Banks Insist

An American Banker Roundup

Amid mounting evidence that credit cards have touched off the next big wave of loan problems, bankers remain remarkably, and almost unanimously, upbeat about the business.

Just days after Bank of New York Co. announced a $350 million provision for card losses, which analysts see as the beginning of an inevitable payback for lenders' and consumers' profligacy, credit card executives maintain a confident, "not to worry" attitude.

Most say there was nothing unexpected or unmanageable about recent uptrends in consumer delinquencies and chargeoffs. Nor do regulators see reasons to panic, given current levels of reserves. (See page 2.)

Conditions "are not bleaker than we thought they would be," said Beverly Wells, president of Wachovia Corp.'s credit card unit in Atlanta. "When we did our projection for this year, we expected to be following a (loss- chargeoff) trend line that would be higher than the last two or three years."

"We have been talking about credit deterioration since mid-1994 and have been adjusting for that throughout" by tightening underwriting criteria, said John C. Tolleson, chairman and chief executive of First USA Inc., recently the fastest-growing of the top 10 card-issuing companies.

He and others viewed the Bank of New York case as isolated and not indicative of all card lenders. First Chicago NBD Corp. spokesman Richard Johnson said it had "no applicability to what we do."

Chargeoffs are "not significantly worse than anticipated," said Jim Armstrong, investor relations spokesman for Atlanta-based SunTrust Banks Inc. The rise was "unalarming" and "there was enough forewarning."

The industrywide numbers, however, sound alarming.

Veribanc Inc. on Monday contributed a set of "serious delinquency" statistics to the darkening cloud over bank card lending. Citing its analysis of call reports, Veribanc said $3.52 billion of loans were at least 90 days past due or in nonaccrual status on March 31.

While the dollar total was unchanged from Dec. 31, serious delinquencies as a percentage of outstandings rose by 9 basis points, to 1.70%. Net chargeoffs, which lag delinquencies, jumped by 12 basis points, to 1.07.

In each case, the industry aggregates are returning to where they were three years earlier. At the first quarter of 1993, the 90-day delinquency ratio was at 1.73% and chargeoffs at 1.15%, and both trended downward through 1994.

Mr. Tolleson of First USA said that in historical context, delinquency and loss ratios were "extremely low coming out of the last recession.

"We're moving up to more normal types of losses and delinquencies," he added. "The anomaly now is we're not in a recession, the economy looks O.K. We're still moving up to more historical norms in the credit card industry."

In its report Monday, Veribanc said the growing delinquencies - which have also been reflected in data from the American Bankers Association and others - indicate banks have been slow to take full advantage of sophisticated tools for risk and interest-rate management.

But Warren Heller, research director at the Wakefield, Mass., analysis firm, said there is a "silver lining" in the data that may justify the card lenders' more positive outlook: "They are not as bad off as they were in the aftermath of the 1991 recession."

In fact, the March 1996 delinquent-balance ratio in each major type of consumer borrowing - credit cards, other installment loans, mortgages, and home equity - is still below the first-quarter 1993 reading.

Serious card delinquencies are highest - for example, installment loans are at 0.95% and mortgages on one-family to four-family homes at 0.92% - and the problems are concentrated among a finite group of lenders. Mr. Heller said one-third of the bad card debt can be traced to roughly 500 of the 6,000 banks that issue credit cards.

As for consumers, "these problems are pretty much card-specific," he said. "Consumers and their families on the whole are not maxxed out" on credit, meaning they have some leeway to pay down their card loans without risking other defaults.

"As recently as two years ago, this wasn't the case," the research director said.

Wachovia, regarded as one of the top risk managers among card lenders, has gone against the current grain, reducing delinquency rates the last four consecutive months. "We're having higher-than-previous-year chargeoffs," Ms. Wells said, "because delinquencies become chargeoffs down the road. We charge off earlier" than industry norms.

"I can't tell you we're not concerned, because we continue to watch it very closely," Ms. Wells added. "But it has not created a significant change for us. We're still running at 50-51% of the industry's chargeoff levels."

And typical of the industry leaders, Wachovia "is comfortable with the level of provisioning" and has not boosted reserves.

Wachovia's southeastern rival First Union Corp. has seen a modest boost in chargeoffs over the last two quarters, said spokesman Jeep Bryant. It was "anticipated as part of a targeted national solicitation that has been under way for some time. ... It's important to keep in mind, however, that bank card receivables represent just 4.5% of First Union's loan portfolio."

Delinquencies "are clearly higher than when we booked the loans, but not higher than anticipated given what's going on in the industry," said Barry Koling, a spokesman for Crestar Financial Corp., Richmond, Va. "We have been dealing with it for some time by improving credit quality and slowing the growth of our portfolio."

At Norwest Corp., another "second-tier" card player, the emphasis is on marketing to deposit customers, said chairman Richard Kovacevich.

"We have much better and deeper information on our existing customers," he said. "We think that risk is much more manageable."

Mr. Heller of Veribanc said the general optimism is well placed "assuming the economy doesn't fall apart, and as of now there are no signs it will.

"But if it becomes precarious and a lot of people start losing jobs, that can tip the balance the wrong way and there could be real trouble."

This article was written by Jeffrey Kutler, with reporting by Brett Chase, Kenneth Cline, and Mickey Meece.

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