Profits from credit card lending declined in 1996 for the third straight year, but the sector still outperformed other bank business lines, according to the Federal Reserve Board.

Returns averaged 2.14% of outstanding balances last year, down from 2.71% in 1995, 3.98% in 1994, and 4.06% in 1993, the Fed said in its annual report to Congress on credit card profits. The average return on assets for banks is 1.86%.

The data are based on call reports filed by 42 banks that devote at least 90% of their consumer loan portfolios to credit card lending and have at least $200 million of assets. Combined they controlled 77% of outstanding credit card debt last year, up six percentage points from 1995.

The news was even worse for small banks, which reported negative returns on credit card lending for a second consecutive year. According to the Fed, 63 small banks averaged losses of 3.75% on their outstanding balances. They had reported a loss in 1995 of 2.93% of outstandings.

Analysts attributed the profitability declines to increased competition and higher losses.

"There has been intense competition with lower rates," said Kathleen Stephansen, senior economist at Donaldson, Lufkin & Jenrette. "You continue to see special offers by money-center banks and regional banks to gain market share."

"Pricing has been real tough," agreed Thomas Facciola, senior analyst at Lehman Brothers. "Teasers have brought rates way down."

Mr. Facciola also said higher delinquency rates had pushed losses to 6% of assets, up 200 basis points.

Michael Auriemma, president of Auriemma Consulting Group, Westbury, N.Y., urged lawmakers to consider these falling profit numbers when weighing fee caps and bankruptcy reform.

"Hopefully this report will bring to light that credit card companies are not making nearly as much as they used to," he said. "Their profits clearly are not obscene and are under constant pressure from competition."

Banks actually should enjoy between 3% and 4% returns on their credit card operations because these loans are unsecured, he said. "They are not being compensated adequately for the risks being taken," he said. "Congress hopefully will recognize that and be more sympathetic."

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