How long can a good thing last? Writeoffs of credit card loans have already plunged below levels that issuers consider sustainable. Continued improvement in delinquencies points to a further dip in loss rates in the months ahead.
The percentage of balances overdue by one to two months fell at five of the six largest issuers in April, according to figures reported this month. The movement was in line with seasonal forces including tax refunds, which make it easier for borrowers to meet their obligations.
If the recent pace at which such early stage delinquencies have become uncollectible holds, chargeoff rates, or the annualized amount of debt written off as a percentage of outstanding receivables, for the Big Six issuers could be 40 to 90 basis points lower in the third quarter than they were in the first quarter. (Click here for an interactive graphic on delinquency and chargeoff rates. The data encompasses securitized receivables.)
JPMorgan Chase’s (JPM) chargeoff rate, including card balances that don’t serve as collateral for bonds, actually ticked up 11 basis points from the fourth quarter to 4.4% in the first quarter.
The company forecast that chargeoffs would retreat to about 4.3% this quarter, however, and it released about $750 million of the amount it had set aside for bad credit card accounts.
The size of the reserve release was higher than in the third and fourth quarters of last year, but much smaller than from the second quarter of 2010 to the second quarter of 2011.
Credit cards have accounted for the lion’s share of the reserve releases that have propped up earnings across the bank industry.
With loss rates already so low, however, JPMorgan’s chief executive, Jamie Dimon, once again warned investors in April that such drawdowns are not likely to continue to be a big factor much longer.
Nevertheless, the company’s total allowance for card loan losses of $7.3 billion still exceeded annualized chargeoffs in the first quarter by $1.7 billion.
The chargeoff rate across Capital One Financial’s (COF) domestic card portfolio fell 15 basis points from the fourth quarter to 3.9% in the first quarter, completely reversing an increase between the third and fourth quarters.
The company forecast that an initial mark it expects to take against the $30 billion portfolio it acquired from HSBC Holding will absorb all the losses from the acquired accounts for a couple quarters and suppress its loss rates during that time.
Subsequently, Capital One predicted that its chargeoff rate would be about 75 basis points higher than it otherwise would have been.
Across the U.S. credit card portfolio at American Express (AXP), the chargeoff rate held steady from the fourth quarter at 2.3% in the first quarter, but the company indicated it has shifted its focus toward expansion of the portfolio.
“It’s our expectation as we grow the business that we would expect to see some tick-up over time in the writeoff rates,” Amex’s chief financial officer, Daniel Henry, told investors in April. “So your bottom line is that tick-up is not a concern to me.”