Chargeoff rates dropped at five of the six biggest credit card issuers in the latest monthly reports, defying the usual seasonal increase.
The data for May continues a long streak of strong credit performance that has extended forecasts of how long low loan losses can last, but reflects caution on the part of lenders and borrowers on the outlook for loan growth. (Data for the nations largest issuers is shown in the following graphic. Interactive controls are described in the captions. Text continues below.)
In contrast to bankers complaints about aggressive competition for commercial and industrial loans, credit card executives like to remark on the rationality of rivals.
Some have pointed to the restraining effect of 2009s CARD Act, which instituted prohibitions on interest rate increases and penalty fees.
The very same thing that leads to relatively weak growth of outstandings in the card business is the same phenomenon that has led, I think, over the last few years, to credit continuing to perform just spectacularly well, and frankly better than expected, Capital One (COF) Chief Executive Richard Fairbank told investors last month.
Fairbank said Capital One is making gains in the market segments it has targeted, but that it is being held back by its decision to steer away from customers who carry large balances from month to month, the one part of the business that generates the most top-line growth.
We are not comfortable with the through-cycle resilience of some of the more heavily indebted and kind of high balance part of the revolver space, he said.
The chargeoff rate, or the annual pace at which loans are written off as uncollectible as a percentage of outstanding balances, for Capital Ones securitized receivables fell 42 basis points from the month before to 2.96% in May. Among the Big Six, only Bank of Americas (BAC) 52-basis-point drop, to 4.03% was larger.
Discover (DFS) was the only member of the Big Six to post an increase, by one basis point to 1.95%. Overall, Discover has been neck-and-neck with American Express (AXP) in the race to claim the lowest chargeoff rate among large issuers.
Both issuers have achieved portfolio growth trajectories that compare favorably with major competitors. Discover says it is focused on taking market share, or inducing its customers to move business they do on competitors products to their Discover cards.
Discover also says it is looking to home equity offerings as a defensive strategy in case borrowers begin to shift balances from cards to loans secured by their homes, as they did in the middle of the past decade during the housing bubble. Rebounding home prices have engendered some optimism about growth prospects for home equity loans, even though chargeoffs of existing debt and relatively low levels of owners equity compared with the boom years pose high hurdles to an industrywide expansion. (Revolving home equity loans have continued to decline so far in the second quarter according to data from the Federal Reserve.)
Delinquency rates at most of the large issuers also declined in May, in line with the typical seasonal pattern. Payment rates, or the percentage of outstanding balances that cardholders pay off each month simultaneously a measure of the ability of borrowers to manage their debt and a read on the direction of loan growth increased across the board.