U.S. credit-card holders continued to pay off their balances at historically strong rates in November, defying predictions that delinquencies would rise as the economy improved and card issuers took on more risk.
The sustained low credit card delinquency rates suggest that two trends are lingering in the wake of the financial crisis: consumers remain cautious about overextending themselves, and card issuers are still wary of offering credit to those less likely to repay.
"People are not adding new cards to their wallets," says David Darst, managing director at Guggenheim Partners. "You're just not going to see delinquencies rise materially without new card growth, because the quality of the portfolios is very high today."
Industrywide, delinquency rates reached 2.83% in the third quarter of this year, their lowest level since regulators began tracking the data in 1991, according to data from the Federal Reserve. And recent filings with the Securities and Exchange Commission illustrated that card issuers are thinking safety first, as November delinquencies remained low despite whatever impact Hurricane Sandy had on the ability of customers in the Northeast Corridor to pay their bills on time.
Delinquency rates varied among card issuers, but all noted they remain well below historic averages.
At Bank of America (BAC), delinquencies and net chargeoffs on the company's securitized card portfolio were both down in November compared with the previous month. Citigroup (NYSE: C) saw a drop in its net chargeoff rate but an uptick in its delinquency rate, while American Express (AXP) saw the reverse.
Discover (DFS) reported a slight uptick in its net chargeoff rate, while its delinquency rate remained flat. JPMorgan Chase (JPM) experienced small increases in its delinquency rate and its net chargeoff rate.
Among the large card issuers, the biggest increase in chargeoffs came at Capital One (COF), which is in the midst of integrating a riskier card portfolio acquired from HSBC. The McLean, Va., company's net chargeoff rate rose from 2.75% in October to 3.11% in November.
The bigger picture is that risk, having largely been wrung out of the card industry during the financial crisis, has yet to make a serious return.
During the crisis, bad loans were written off, credit standards were tightened, and consumers reduced their debt loads. All of those factors converged to produce low loss rates on the loans that remained in issuers' portfolios — despite an elevated unemployment rate, which historically was linked to higher losses on credit cards.
Some of the industry's recent shift away from risk may be structural rather than cyclical, says Mike Taiano, senior research analyst at Telsey Advisory Group.
He points to the 2009 credit card reform law as a factor that undermined riskier underwriting, and notes that card issuers have been chasing customers who pay off their balances each month. Such customers allow the issuer to earn money from swipe fees rather than from interest paid on revolving debt.
"I'm not sure that we're going to get back to what I think was historically a 5% average loss rate for the industry anytime soon," Taiano says.
Still, he predicts that the low delinquency rates will begin to rise soon, as new accounts begin to grow.
"My view is that the improvement we've seen over the last few years is likely in the final innings, if not the final inning," he says.
Yet as Guggenheim Partners' Darst points out, analysts have been predicting a significant deterioration in credit quality for a while now, and it has yet to happen. Darst now thinks it will be late 2013 before delinquencies rise significantly.
"That may not fully materialize until we see new balance growth," he says. "That's going to be the initial signal that we're going to see before people really project losses to go up."
The November filings showed higher loan balances, but analysts were unsure how much of that trend was due to the seasonal impact of holiday shopping.
"We're maintaining a cautious view on the consumer's appetite to revolve, barring a stronger economic recovery," Bill Carcache of Nomura Equity Research wrote in a note to clients.