The financial crisis changed the habits of many credit-hungry U.S. consumers, but as households gradually re-embrace higher levels of debt, the nation’s biggest credit card companies are starting to feel the pinch.
During the first quarter, all six big issuers reported an increase in chargeoffs in their credit card portfolios as compared with the same period a year earlier. Those six firms — American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services and JPMorgan Chase — account for approximately 60% of total market share in the general-purpose card industry.
The results suggest that the post-crisis era of exceptionally low losses in the card industry has run its course.
The increase in problem credit was greatest at Capital One. The McLean, Va., company, which caters more to borrowers with low credit scores than some of its competitors, reported a 5.14% net chargeoff rate in its U.S. card business. That result was up from 4.16% in the first quarter of 2016.
Capital One also made an upward revision to its projection for credit card losses in 2017. Shares in the company fell 2.9% Wednesday, closing at $83.06.
The worse-than-expected results at Capital One come at a time when Americans are trying to juggle more debt than they were a few years ago.
“Over the past year and a half, we have seen increasing competitive intensity, a growing supply of credit and rising consumer indebtedness,” Capital One CEO Richard Fairbank said Tuesday during a conference call with analysts. “Revolving credit grew at about 6.5% year over year, the seventh consecutive quarter it has grown much faster than household income.”
During the fourth quarter of 2016, U.S. households had $12.58 trillion in total debt, which was up 13% from the second quarter of 2013, according to the Federal Reserve Bank of New York. Total household debt peaked at $12.68 trillion in the third quarter of 2008.
But Discover Financial Services CEO David Nelms downplayed the role that rising consumer debt levels may be playing in pushing credit card payment rates lower. Discover, based in Riverwoods, Ill., saw its chargeoff rate rise to 2.84% in the first quarter, up from 2.34% a year earlier.
“I am actually very comfortable with where consumers are,” Nelms told American Banker. “They de-levered significantly after the crisis, and I think we’re now starting to see a little bit of a recovery off of an unusually low level.”
There are other factors that are clearly contributing to higher losses in the industry.
One key point is that the card companies charged off a lot of bad loans in the wake of the crisis, which can be likened to cherry-picking and then holding onto the best loans. As consumers have paid off that debt, loss rates in the industry have been climbing.
“As you move further away from the financial crisis, you have fewer and fewer recoveries, and that’s driving losses higher,” said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods.
Another factor is that the credit card industry has reported accelerated loan growth in recent quarters, which is putting upward pressure on losses in the near term, since the loans tend to go bad at higher rates in their early stages.
Looking ahead, if the U.S. unemployment rate rises substantially, credit card loss rates can be expected to follow suit. But it's hard to know how much more loss rates would increase if current economic conditions persist.
Legislative changes enacted in 2009 prevent card issuers from raising interest rates on existing card debt, which has made issuers more cautious about when to extend credit. The upshot may be that the industry’s long-term loss rates will remain lower than they were in earlier decades.
During an April 13 conference call, JPMorgan Chief Financial Officer Marianne Lake was asked about losses in the firm’s credit card business. “One of the things that we want to remind everybody before we talk about the trend is that the credit card losses are still at absolutely very, very low levels,” she said.