BOSTON — Losses on credit-card loans edged higher in May but delinquencies tapered off, igniting hope of a turnaround among investors of plastic.
But analysts warn that it may still be premature to call the bottom as higher unemployment and a soft economy continue to push borrowers over the edge.
Credit-card companies — such as JPMorgan Chase & Co., Capital One Financial Corp., Bank of America Corp., Citigroup Inc., Discover Financial Services and American Express Co. — are grappling with not only losses on souring credit-card debt but also sweeping new legislation that would bite into industry profits.
"Higher losses are in the pipeline for major card issuers," said analysts led by John McDonald, at Bernstein Research, in a research note published Tuesday.
Bank of America appeared to fare the worst of the top credit-card issuers, according to a monthly report card on the performance of bonds made up of pools of credit card loans. It wrote off 12.50% of its card loans last month, up from 10.47% in April.
In comparison, the credit-card units at Citigroup and JPMorgan wrote off 10.50% and 8.36%, respectively.
"We continue to be concerned with losses and are managing our risk appropriately," said a JPMorgan spokesman. The credit-card issuer expects losses to be in the 9% range this year. A Citi official declined to comment, while a Bank of America official didn't respond to a request seeking comment.
Capital One wrote off 9.4% of card loans bundled into bonds and on its books in May, up from 8.6% in April. Discover Financial wrote off 8.9% of its card loans in May. Officials at the two companies declined to comment.
In contrast, American Express' loss rate on loans declined modestly to 10% last month from 10.1% in April. The company wrote off 8.5% of its loans in the first quarter and estimates losses on card loans could increase by as much as 2-to-2.50 percentage points in the second quarter, and another half-percentage point in the third quarter, before leveling off in the fourth quarter.
That said, delinquencies, on average, declined modestly in May. This is important because higher delinquencies force issuers to squirrel away capital to reserve for potential losses; ultimately, companies must write off loans if customers can't pay up. On average, for Bank of America, Citigroup and JPMorgan, borrowers who are a month behind their card payments declined 3.7% last month from April.
"While declining delinquencies could be a sign of stabilizing charge-offs ahead.... We expect unemployment to continue to trend higher given what we expect to be an anemic economic recovery, suggesting that still meaningfully higher charge-offs should be anticipated," said analysts led by Jeff Harte, at Sandler O'Neill & Partners, in a note published Tuesday.
