A clear picture of worsening credit card performance has emerged from this month's third-quarter earnings reports and conference calls.
Large issuers ratcheted up loss projections, reported funding disruptions in the capital markets, and expressed caution about lending. Executives said the industry would adjust to the consumer-protection rules under consideration, though they could be costly in the near term.
Growth was uneven, sometimes even within portfolios. Capital One Financial Corp., for example, said its number of accounts fell 1.3% from the second quarter and 7.7% from a year earlier, to 37.9 million at the end of the third quarter. But receivables increased 1.9% from the second quarter and 4% from a year earlier, to $69.4 billion.
Richard Fairbank, Capital One's chief executive, said the account decline reflected tighter underwriting. The receivable increase resulted from a "strong response to our targeted third-quarter marketing offers, a reduction in balance transfers away from Capital One, and a modest decline in payment rates."
James Dimon, JPMorgan Chase & Co.'s CEO, said his company is "not panicking," though anyone who is not "fearful" about economic conditions is crazy.
"We're not big speculators, but we are buying slightly more risky assets, and we're growing our businesses everywhere," he said. "Credit card receivables are up" at JPMorgan Chase. "We are not pulling out of California. We're still going there. We're still marketing."
His company attributed a 5.4% decline in noninterest expenses from a year earlier to lower marketing costs. Nevertheless, transactions on its cards increased 0.3% from the previous quarter and 4.6% from a year earlier, to $93.9 billion. New accounts were unchanged from the previous quarter but fell 10% from a year earlier, to 3.6 million.
"From what we know, Visa numbers are more like zero" in terms of card transaction growth, Mr. Dimon said. "We seem to be gaining a little bit of share" from other issuers on the network. (Bank of America Corp., Citigroup Inc., and Capital One all reported transaction volume declines.)
Mr. Fairbank said Capital One remains "cautious on loan growth" and continues "to focus our marketing" selectively.
Gary Crittenden, Citi's chief financial officer, repeated something he has said in previous quarterly conference calls: Its overall loss rates could set records during this downturn.
In fact, the third-quarter chargeoff rate for Citi's North American credit card business has exceeded the levels reached after the 1990s recession. It increased 60 basis points from the previous quarter and 262 basis points from a year earlier, to 7.1%. After the recession of the early 1990s, Citi's card loss rate peaked at 6.4%.
JPMorgan Chase's forecast that its chargeoff rate this quarter will be 5% or higher was consistent with its previous guidance, but now it projects that next year's rate will range from 6% at the beginning of the year to 7% by yearend. It had previously forecast an average rate of 6% for next year.
B of A's chargeoff rate increased 44 basis points from the previous quarter and 173 basis points from a year earlier, to 6.4%. The Charlotte company said the rate would likely exceed 7% if the unemployment rate topped 7%.
Kenneth Lewis, its CEO, said on a conference call that chargeoffs in different loan categories might not peak "until well into 2009."
B of A had said in July that it did not expect its chargeoff rate to surpass a "normalized" range of 5% to 5.5% by more than 100 basis points, and that an increase in that range would reflect "recessionary conditions."
During the third quarter cards accounted for about 60% of its $5.2 billion of consumer chargeoffs, along with about 30% of its $2 billion buildup in reserves — only unsecured consumer lending accounted for more.
Citi said most of the $309 million addition to its allowance for North American credit card losses was associated with a move to bring receivables back on the balance sheet in response to "rate and liquidity disruptions in the securitization market."
Despite those conditions, the net interest margin on Citi's North American credit card business increased 47 basis points from the second quarter and 53 basis points from a year earlier, to 11%.
Mr. Crittenden said the margin "is durable for a while," because slowing payment rates would boost yields, and "it is unlikely — at least in the short term, I think — for funding costs to go up."
If the securitization channel were to shut down, Citi would have "a wide range of choices for how we fund the receivables," he said. "We have the entire right-hand side of the balance sheet for the most part."
If a "dislocation" persisted in the relationship between the London interbank offered rate (the benchmark for many types of bank borrowing) and the prime rate (the benchmark for card interest rates), Citi would change its "pricing mechanism," Mr. Crittenden said. "Over time that disparity is something that we would not be able to tolerate, so we would make adjustments … to reflect the discontinuity."
Citi still expects securitized card assets to return to the balance sheet at the beginning of 2010 as a result of potential changes to the accounting rules for off-balance-sheet vehicles, he said.
Until then the amount of securitization it does will depend on conditions in capital markets, Mr. Crittenden said. "If the markets for securitization open up, [and] funding costs come down, we are likely to continue to do more securitization. If they don't, and if they are tight, and if funding costs are high, as they were at the back end of the last quarter, then we are likely to have … [receivables] come on to our balance sheet."
JPMorgan Chase said the amount of equity it had allocated to the card business at the end of the third quarter rose 6.4% from a quarter earlier and a year earlier, to $15 billion.
Michael Cavanagh, the New York company's CFO, said the allocation level was determined "with a view to where the business is going to go once card securitization has come on balance sheet," because of the possible changes to accounting rules, "and we're under Basel II" capital rules.
A bill the House passed this year would prohibit raising rates on existing card debt except when a consumer pays a bill 30 days or more late, a promotional rate expires, or an index tied to the rate increases. The bill also would ban double-cycle billing, restrict fees, and bar minors from obtaining cards. The Senate is not expected to take up the bill this year, but the Federal Reserve Board has proposed similar reforms.
Asked about the possibility of tighter card regulations to protect consumers, Mr. Dimon and Mr. Cavanagh said that JPMorgan Chase had already eliminated double-cycle billing and pricing changes based on customer delinquencies with other lenders, costing the company about $700 million over the course of about a year. Other rules under consideration "could be significant," Mr. Dimon said. "So any one change on its own could be hundreds of millions of dollars, or something like that. In total, they could be well over $1 billion."
However, he also said JPMorgan Chase would adjust. "If you can't reprice certain loans, you are not going to make certain types of loans. If you have to have people pay off teaser-rate loans last on a series of loans, we're not going to make teaser-rate loans." he said. "Honestly, some of the fees or outstandings we were going to pull back on weren't that profitable anyway, so we're going to run the business for profit. If outstandings go down $10 billion, so be it."
Mr. Crittenden said the changes that have been proposed would probably have "a material impact on the way we currently approach the card business."
The industry would likely shift the mix of revenue sources that issuers use among the basic categories of merchant discounts, cardholder fees, and interest charges, he said.