Credit card delinquencies and chargeoffs may be on the decline, but there will be limits, said Shailesh J. Mehta, chairman, president, and chief executive officer of Providian Financial Corp.
Mr. Mehta, one of the credit industry's pioneering mathematical and data-mining analysts, who traces his card lending experience back to 1975, said he does not see these measures of credit quality ever returning to where they were three years ago.
He said average chargeoffs have been rising by 0.5% to 1% every five years. With each uptick, the industry's comfort level has increased accordingly.
"Between 1975 and 1980, people were worried about 1.5% chargeoff rates," he said. "Between 1980 and 1985 it suddenly became acceptable to have 2% or 2.5% losses, and from 1985 to 1990 you went to 3.5%."
Today's chargeoff rates are hovering around 6.5%, according to the credit rating service Fitch IBCA.
"I don't see the next decline being as steep as the rise was," said Mr. Mehta, adding that "trigger events" have contributed to the periodic escalations.
Around 1980, it was Citibank's marketing of cards nationwide. Five years later, monoline card issuers began to make an impact. In 1990 "we were hit with the recession and the loss rate jumped, and it never came back to the pre-recession level."
The "trigger event" of 1995-which Mr. Mehta sees resonating through 2000-was the "credit for sale" phenomenon: teaser rates, balance transfer offers, and an abundance of easy credit.
"If you are mildly creditworthy, you can get so much credit at such a cheap price that there is a tendency for a small percentage of people to overbuy," said the San Francisco-based executive. "As long as we have an oversupply of credit with a very discounted price, it's not unrealistic to assume that we will be overbought, and some people will be unable to meet their obligations."
Many credit card experts and analysts are worried about how the high delinquency and bankruptcy rates persisted through the economic expansion and bull market. Some expect rates will skyrocket when and if there is a recession.
Mr. Mehta identifies a parallel concern.
"Good economy or bad economy, if I load you up with more credit than you deserve, at some point in time your income can no longer support your debt load," he said.
A credit card executive "has to plan one's business factoring those risks in, and accordingly price and structure the terms" of an offer.
Providian, characterized as a monoline since its spinoff last year from the insurance company of the same name in Louisville, Ky., has done well and continues to market aggressively despite the chargeoff and bankruptcy cycle. It has begun to promote products in several high-risk categories, such as people who carry card balances exceeding $10,000, and those with mildly impaired credit histories.
Mr. Mehta, 49, said Providian has made "breakthroughs" in its screening and underwriting criteria, as well as in collections. Among the new techniques is a screening method he refers to as "telecredit."
"We telephone and talk to each and every customer," Mr. Mehta said. "We get some customer data to engineer the product, to set the right terms and pricing based on the risk."
Providian has also added a "new dimension" to credit scoring. It sifts through internal and external data for "trigger events" that might affect a customer's ability to pay. These and other enhancements give Mr. Mehta confidence that the company, which has a $12 billion portfolio of managed loans, can keep finding and adding customers overlooked or "underpenetrated" by the rest of the industry.
"We need the risk management ability," he said. "You can't go and do business in an 8% loss market with the same product you would in a 3% loss market."
Analysts at Donaldson, Lufkin & Jenrette regard Providian as "well compensated for risk." In a July report on credit trends, the analysts echoed some of Mr. Mehta's views: "We remain optimistic that at least over the near term, credit costs will be flat to declining. Delinquency rates- among the better leading indicators of future-period loss rates-continue their decline."
Providian has altered its home equity strategy. Once these were "classic, plain-vanilla 100% loan-to-value" products that were marketed almost as an afterthought. After management noticed that this part of the portfolio had grown past $1 billion, it took closer interest.
"We were telling too many customers 'no,' many times because of an inflexibility in our product design," Mr. Mehta said. Nine out of every 10 applicants were refused.
"We needed to create more options for customers, and that required reengineering the operating platform, which we just completed," Mr. Mehta said. "So you will see more aggressive growth in the second half of this year, and a lot more next year."
Providian has also begun offering home equity loans to people with credit card debt as high as $25,000. Many of those borrowers "are in denial mode," Mr. Mehta said.
"They think the mortgage is a real debt, the auto loan is a real debt, but the credit card is not a real debt-they think it's temporary. They say, 'I'm going to pay it off next month.'"
To help such people straighten out their finances, Providian encourages conversion to home equity credit, which brings a lower interest rate, lower payments, and tax deductibility. Mr. Mehta said this and other new wrinkles emerged from detailed research into the spiraling bankruptcy rate.
Asked why the monoline card issuers-also including MBNA Corp., Capital One Financial Corp., and Metris Cos.-have been performing better than most traditional bank card issuers, Mr. Mehta said their "small and focused" nature has engendered creativity and innovation.
"You will find that each one has a particular niche, a value proposition, or a competitive advantage that they can protect and sustain in this marketplace," said Mr. Mehta.
For example, in the secured card, or "unbanked" business, "we are very well known and very good," he said. "A half dozen large players have been telling me now for over a year that they want to enter that business because they like it, and I'm sure they will.
"But we have been able to sustain the momentum and growth because every month or so we are introducing something new to stay ahead of the curve. We're building the necessary fortress to protect that part of the business, so that even if someone wants to get into it, they're always behind us."