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Charge-off rates continued to drop throughout the credit card industry in October, bolstering the view that the sector is beginning to pull out of a troubling cycle of credit losses.
The monthly reports issued earlier this week showed that delinquency rates continued to climb, however, suggesting a great deal of pain is still ahead.
Sanjay Sakhrani, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., called the results "generally positive" because the month-to-month decline in charge-off rates broke with the seasonal pattern, according to American Banker, a Collections & Credit Risk sister publication.
The increase in delinquencies was slightly bigger than the deterioration that usually takes hold this time of year, but Sakhrani said this was unsurprising since portfolios — and thus the denominators used to calculate performance ratios — are shrinking.
"We may have seen the peak" in charge-offs, he says.
For securitized receivables at Bank of America Corp., which has reported the worst credit performance among the six largest U.S. issuers, the charge-off rate fell 103 basis points, to 13.22%, a bigger improvement than the 29-basis-point drop in September. But B of A's delinquency rate rose another 6 basis points, to 7.59%.
BofA has said that the dollar amount of its charge-offs may have peaked in the third quarter. But at a presentation this month, Brian Moynihan, BofA's president of consumer and small-business banking, said that, though charge-offs track initial unemployment claims — which have fallen substantially this year — more closely than the unemployment rate, "a substantial number of quarters" must elapse before they "return to levels which we are more comfortable with." A "normalized" charge-off rate would be about 5%, he says.
American Express Co. reported that the charge-off rate for its portfolio of U.S. credit card loans once again fell 60 basis points, to 7.8% in October. The company appears to be getting out of the credit downturn faster than competitors and has said it believes its charge-offs peaked at 10% in the second quarter.
The charge-off rate for securitized receivables at Discover Financial Services fell 15 basis points, to 8.54%, in October, but its delinquency rate rose 15 basis points, to 5.72%.
Among the top issuers, Discover has experienced the mildest deterioration in credit quality since the recession began. Last week it reiterated its projection that its charge-off rate will prove to have risen from 8.4% in the previous quarter to 8.5% to 9% in its fiscal fourth quarter, which ends Nov. 30.
After a steep ascent as the recession worsened, the monthly industrywide charge-off rate fell for the first time in 10 months in July, only to rebound to a new record of 11.49% in August, according to a Moody's Investors Service Inc. index. It then dropped back to 10.72% in September.
Charge-offs typically lag initial delinquencies by about six months, and the industrywide delinquency rate fell from April through July but began to climb again in August.
Initial signs of a turn in the credit cycle have coincided with: a sharp drop in job losses, which averaged 645,000 a month from November last year through April, then fell to 190,000 in October; seasonal factors, like tax refunds in the spring; and stimulus distributions. Delinquencies typically grow late in the year.
Curt Beaudouin, a Moody's analyst, wrote in a report this month that the rating agency still expects industrywide charge-offs to peak during the first half of next year, roughly in tandem with the unemployment rate, which rose 0.4 percentage point, to 10.2%, in October.
The charge0off rate in Capital One Financial Corp.'s portfolio of U.S. credit card loans fell 73 basis points, to 9.04%, in October, and its delinquency rate rose 34 basis points, to 5.72%, CCR Newsline reported earlier this week. Last week, the company reiterated its projection that the dollar amount of its charge-offs will peak in the "next couple quarters," though the charge-off rate will continue rising after that as receivables decline.
Moynihan said BofA is focusing on cultivating cardholders who have deposit and other accounts at the company, while letting "other portfolios which are more stranded run off." The goal, he says, is to produce "a better balance of transactions versus borrowing," reports American Banker.
