A sharp drop in credit card chargeoffs in January is being held up by some analysts as a sign that lenders may be putting last year's crisis behind them.
Chargeoff rates, which had been trending downward late last year from record levels in the second quarter, in January tumbled to their lowest level in 11 months, according to reports from several rating agencies.
Taking heart from the news, credit watchers are suggesting that a tightening of standards has helped card issuers stumble out of the credit- quality crater more or less intact.
Salomon Smith Barney, which has tracked two consecutive quarters of improving chargeoff rates, is declaring "a possible trend where people haven't wanted to utter that word," said Jacqueline Reeves, an analyst there.
"I wouldn't say we're overly optimistic," she said, but "it does seem like we're seeing a significant improvement in the chargeoff ratios."
Alison B. Emmerich, an analyst in Standard & Poor's structured finance group, put it this way: "In the fourth quarter I saw stabilization. The January figures are the first sign of an overall downturn I've seen."
Among securitized portfolios tracked by Standard & Poor's, the chargeoff rate fell to 6.5% in January from 6.9% in December, the largest monthly decline in three years. However, chargeoffs still remained above the January 1997 level, 6.4%.
Fitch ICBA reported similar numbers for January, which it called the "sixth consecutive month of stable performance," with the "lowest monthly rate since March 1997." Fitch predicted chargeoffs would ebb or remain stable through the second quarter of 1998, because of issuers' "proactive collection efforts and improved underwriting standards."
Indeed, the consensus among analysts and economists seems to be that bank card issuers grew alarmed by dismal repayment rates several years ago, reined in their lending practices, and are now reaping the fruit of those efforts.
"Clearly, those steps translated into some improvement in portfolio quality, but it takes awhile for that to take place," said Keith Leggett, a senior economist at the American Bankers Association.
The ABA will not release its consumer loan data for the fourth quarter of 1997 until March 17, but it has taken note of the statistics put out by other groups. Mr. Leggett said the numbers he has seen indicate "we're in a period where we're going to have a fairly high plateau as far as delinquencies" and that "the numbers will bounce around a bit" both on delinquencies and chargeoffs.
Mr. Leggett cautioned that chargeoff rates do not tell the whole story. He saw a "little sign of concern" in the increase in delinquency rates that Standard & Poor's reported in January. "That may indicate that there could be a pickup in chargeoffs later this year, because delinquencies are a leading indicator of chargeoffs," he said.
Analysts said some of the decline in the January figures was due to an accounting change at Capital One Corp., which began charging off unpaid debts after a shorter period of delinquency. Seasonal fluctuations might also have played a role. But analysts agreed that the January numbers represented some measure of real progress.
"It looked like more of a decline than it actually was, but it's still the lowest that it's been since last February," Ms. Emmerich said. "We're also seeing some differentiation in performance."
Some card issuers-like Metris Cos., which targets riskier consumers-are accepting higher chargeoffs "if they can reprice for those chargeoffs," Ms. Emmerich said.
Some issuers have fared better than others. Fitch reported lower chargeoff rates at BankAmerica Corp., the Discover portfolio, First Chicago NBD Corp., and Providian Financial Corp. It found higher chargeoff rates at First USA and the Advanta Corp. portfolio, which is now owned by Fleet Financial Group.
Richard C. Drason, an associate director at Fitch, said many issuers are adopting "risk-based pricing to offset the rise in chargeoffs." As customers' introductory rates expire, he said, issuers are repricing interest rates based on the borrowers' historical willingness to repay loans.
Mr. Drason said issuers began enhancing collection efforts in early and mid-1997, giving them a firmer grasp on chargeoffs.
"When we look back on the first half of 1997, chargeoff rates were just going wild," Mr. Drason said. "Toward the second half of the year, the rate from month to month was beginning to slow. Issuers were being proactive, and it was staring to show."
Analysts agreed that issuers were getting choosier about target marketing, sending fewer scattershot solicitations.
Lisa Itzkowitz, director of marketing at BAI Mail Monitor of Tarrytown, N.Y., said mail solicitation volumes have been dropping. The second quarter of 1997 saw a record of 881 million pieces, driven largely by platinum offers and First USA's enormous mailings. The third quarter of 1997 produced the second-highest volume BAI had ever seen, 748 million pieces, and fourth quarter volume dropped to 742.6 million pieces.
During more typical quarters, mail solicitations number 550 million to 650 million, Ms. Itzkowitz said.
"The increase in mail volume is obviously a reflection of an increase in competition," she said. "Because of that, the price on the card has been driven down, and in that respect the customer has benefited."
Don Hilber, a senior economist at Norwest Corp., said he saw "a lot of positive signs in place" for the credit card industry, including a strong economy, lower interest rates, and a decline in consumer credit as a percentage of income.
If lending "standards remain the same, then we're not going to have a problem," Mr. Hilber said. Chargeoff rates "are not going to fall instantly. Lenders are still going to have to live with some of the bad credit decisions they made a few years ago."
However, he said, "the trend is getting better."
