Defaults on credit card loans have emerged as an area of concern for U.S. banks in recent months, and third-quarter results from JPMorgan Chase and Citigroup — the nation’s two largest credit card issuers — suggest that there is more trouble ahead.
Both banks reported a sharp increase in credit-card related losses in the quarter when compared with the same period last year and both boosted their loan-loss reserves in anticipation of more weakness in their card portfolios. With household debt now at an all-time high, investors appear to be bracing for more defaults and, potentially, lower overall profits.
“Clearly there are concerns that rising card losses will pressure net income growth,” said Brian Foran, an analyst at Autonomous Research.
Citigroup’s shares were down 2.6% in late trading Thursday while JPMorgan’s were down roughly 1%. Foran noted that the stocks of other card lenders also fell “in sympathy” with Citigroup and JPMorgan. Capital One Financial’s stock was down 2% and Discover Financial Services’ shares were off by 1.6%.
Citi and JPMorgan executives said that worries about consumer defaults are overblown and that higher loss rates and reserves are only functions of a rising-rate environment and the banks’ attempts to expand their card businesses.
Moreover, the trouble in cards has not hurt the banks’ overall performance. JPMorgan’s third-quarter profit rose 7% to $6.7 billion on higher business lending and growth in asset management. Citigroup posted about $4 billion of net income, an 8% increase, fueled by an increase in corporate lending and expense cuts.
Still, the two banks’ results show that consumer lending is becoming a bit riskier than it was this time last year. Citigroup’s net credit losses from credit cards rose 32% to $1.2 billion compared with the same period a year earlier; Citigroup also added $500 million to its loan-loss reserves due to projected card losses. Net chargeoffs in JPMorgan’s credit card portfolio jumped 22% to about $1 billion. JPMorgan also added $300 million to its card reserves.
JPMorgan Chief Financial Officer Marianne Lake said during a Thursday conference that the bank had expected its chargeoff rate to spike upward because it has increased marketing of cards to consumers with lower credit scores.
The company a few years ago made a “very targeted surgical credit expansion” in its card book, Lake told analysts.
Citigroup attributed the weakness in its credit card segment in part to the fact that many of its cards have promotional low rates, which precludes the bank from taking advantage of recent rate hikes.
Late last year, Citigroup started to back away from cards that offered rich rewards p and instead try to expand so-called “value products,” Chief Financial Officer John Gerspach said during a conference call. Cards in the “value” segment feature promotional balances and consumers’ response to those cards was greater than expected, he said.
“That’s resulted in a higher amount of these non-yielding promotional balances in our portfolio,” Gerspach said.
Citi’s credit losses were also affected by accounting adjustments related to last year’s acquisition of the Costco card portfolio. Gerspach said that that business would soon be making a sizable contribution to earnings.
“Costco remains a real winner,” Gerspach said. “We’re seeing solid revenue growth.”
There were some positive signs in credit card lending. JPMorgan’s total consumer card portfolio increased 6% to $141 billion. Revenue from private-label credit cards that Citigroup issues on behalf of Home Depot and other retailers rose 2% to $1.7 billion.
JPMorgan has seen a 13% year-over-year increase in card spending, in large measure because of new product offerings, Lake said.
“Spend engagement is fantastic,” she said. “We invest in these cards for relationships with customers over five to 10 years, so we’re very encouraged with the performance.”
More broadly, consumer credit appears to be holding up well. The delinquency rate on consumer loans in the second quarter was 1.56%, unchanged from the previous quarter, according to the American Bankers Association. The percentage of consumers who were at least 30 days on late on bank-issued credit cards dropped to 2.67%.
Separate from the issue of credit cards and consumer debt, concerns were also raised on Wednesday about Citigroup’s long-term prognosis for profitability. The International Monetary Fund said that nine global financial institutions may struggle in the global economy due to “thin capital buffers relative to future regulatory requirements and relatively weak profitability to build those buffers.” Citigroup was the only U.S.-headquartered bank included on the list.
Wells Fargo Securities analyst Mike Mayo, during Citigroup’s conference call, asked if the company should consider selling off further assets in a bid to address the IMF’s concerns.
CEO Michael Corbat demurred, saying that Citigroup is in a good position to meet its profit goals.
“There's no underlying analysis that we can find in terms of how [the IMF] came to those numbers, so we don't understand how they reached their conclusions,” Corbat said in response to Mayo. “We disagree with them.”
Kristin Broughton contributed to this story.