Credit card issuers have adopted a potentially dangerous "business as usual" attitude toward high delinquency rates, a bank research firm has warned.

Veribanc Inc. of Wakefield, Mass., said credit card debt topped $400 billion for the first time in the third quarter of 1997 and seemed poised to exceed $450 billion by yearend.

With those numbers come troublesome levels of risk, said Veribanc research director Warren Heller.

"If you believe what industry people and some of the regulators are saying, this is the 'new normal,'" he said.

Credit card debt grew by $40 billion, to $410.6 billion, in the 12 months that ended Sept. 30, 1997, according to Veribanc's compilations of bank regulatory filings.

Although card delinquencies and chargeoffs dropped slightly from the second to the third quarter of 1997, they have nonetheless been climbing steadily from year to year.

Veribanc said third-quarter net chargeoffs were $3.06 billion, up from $2.31 billion a year earlier.

Bankers have been buoyed by the fees and profits credit cards continue to generate, Mr. Heller said, and have turned a blind eye to the turbulence of the business.

"If you take a somewhat narrow view, the risks are not out of line with the returns," Mr. Heller said. "But at some point there will be an economic downturn, and the risk of that isn't being accounted for" by card issuers.

"Can you imagine someone at a large institution-say a vice president of consumer lending-saying, 'It's time for the downturn to come; let's slash the bottom 25% of our card portfolio'?" Mr. Heller said. "I don't think that would fly. It would be impossible to put the brakes on before there are real problems."

For both credit card debt and all other types of loans, Veribanc divided the rate of return on average outstanding debt by its volatility, which is defined as the degree to which the chargeoff rate fluctuates from quarter to quarter.

Veribanc concluded that credit card loans are highly profitable-with gross annual returns of 13.7% in the three years ending Sept. 30-but also much more volatile than other loan activity. Their volatility-measured as the quarter-to-quarter standard deviation from the mean-was 28%, versus 19% for other categories combined.

But credit cards had the same ratio of return to risk-49%-as the more stable loans.

"From an overall risk management point of view, the returns are greater, the risks are greater, and the industry seems to be managing that accordingly," Mr. Heller said. But in a downturn, "We'll look back and say, 'How could we have missed this obvious situation?'

"Most of the issuers believe they can anticipate the downturn-the credit scores will give them adequate warning and they will at that point rein in their portfolios," Mr. Heller said. "I don't think it will be that easy."

Mr. Heller is not alone in raising this concern. Last month, the Consumer Federation of America warned that consumers were overextended and that banks were lending irresponsibly.

"Banks with a (chargeoff) rate above 6% are clearly extending too much credit to too many consumers who cannot afford it," said Stephen Brobeck, the Washington group's executive director.

Mr. Heller said record bank profits, low unemployment, and loan demand generated by a growing economy conspire to create complacency. Growing fee income from businesses like credit cards has helped offset less lucrative banking activities.

Analysts at Standard & Poor's also warn that an economic crunch would send chargeoff rates soaring. But they see no reason to panic, saying most issuers are lending sensibly.

"There is no return to the 3% chargeoffs that we saw a while ago-we all know that," said S&P analyst Alison B. Emmerich. "But I don't think you can say a company above 4.5% or 5% in the chargeoff rate isn't doing well. The important thing is how well they are compensating for it.

"We're seeing a number of issuers purposely going after the lower- credit-quality customers and compensating with higher yields," Ms. Emmerich added. She said Capital One Financial Corp. "is a good example. They are down-tiering a little bit, but what they're making off those customers is good. ... The word isn't really out about how well that's going to do in the long run."

Chris Mrazek, a director in Fitch Investors Services' credit card group, agreed that chargeoff numbers do not tell the whole story.

Mr. Mrazek said he sees no recurrence of the "new-origination frenzy of 1994 and 1995," in which issuers rushed to sign up "accounts that might not be booked today." Instead, "growth has slowed, people have tightened their underwriting standards."

In its Dec. 22 report on credit trends, Donaldson, Lufkin & Jenrette saw reasons for "cautious optimism." Consumer credit growth has slowed and national bankruptcy filings were down 10.5% from October to November, the firm said, quoting Visa statistics.

With "clear signs of moderation in the rate of credit quality erosion, we can anticipate continued moderation in the rate of increase-if not a sustained decline-in credit card portfolio loss rates," wrote Susan L. Roth, a vice president at DLJ.

Mr. Heller acknowledged the hopeful signs, but said bankers and regulators still seem too relaxed.

"It's a matter of margins," Mr. Heller said. "Suppose you're walking on the edge of a cliff because that's where you like to walk. Are you comfortable 10 feet away from the edge? Three feet? Six inches? What if all of a sudden you get surprised?"

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