JPMorgan Chase & Co.’s Card Services unit Thursday reported a strong increase in second quarter profits and spending volume, powered by credit card customers using their cards for routine spending while paying off their outstanding balances at a higher rate.
The unit’s net income for the quarter was $911 million for the quarter ended June 30, up 166% from $343 million a year earlier, largely attributable to lower loan-loss reserves. Net revenue for the card unit was $3.93 billion, down 6.9% from $4.22 billion.
The provision for loan losses fell 63.1%, to $810 million from $2.2 billion, as fewer consumers defaulted on accounts.
The net charge-off rate on outstanding card receivables was 5.82%, down 438 basis points from 10.2%. The delinquency rate for accounts at least 30 days past due was 2.98%, down 198 basis points from 4.96%.
Net interest income for the cards unit was $2.91 billion, down 13.4% from $3.36 billion, caused by lower average loan balances and the effect of the Credit Card Accountability, Responsibility and Disclosure Act, Chase said. The CARD Act went into effect last year, constraining issuers’ ability to raise cardholders’ interest rates.
Expenses rose 14.3%, to $1.6 billion from $1.4 billion, partly because of higher marketing expenditures, the company said.
The Card Services Unit opened 2 million new accounts during the quarter, down 26% from 2.7 million, partly because of the company’s April 1 sale of the $3.7 billion Kohl’s Corp. private-label card portfolio to Capital One Financial Corp. As a result, Chase had 65.4 million open accounts at the end of June, down 26.4% from 88.9 million a year earlier.
Branch sales of credit cards were down 20% from a year ago, according to Chase, which did not provide totals.
Consumer credit card sales volume during the quarter rose 9.5%, to $85.5 million from $78.1 million a year earlier.
Merchant processing volume totaled $137.3 billion, up 17.3% from $117.1 billion, on 5.9 billion transactions processed, up 18% from 5 billion a year earlier.
Chase’s credit card charge-off rate should fall to about 4.5% by the middle of next year, as “rapid improvement” continues within the portfolio, Doug Braunstein, Chase chief financial officer, told analysts during a conference call to discuss the quarter’s earnings.
“We continue to believe that sales volume is outpacing industry sales growth and, as a result, we think we’re improving our market share,” Braunstein said.
Chase in recent months also has increased its share of customers with higher credit scores. Such consumers tend to pay off their bills every month, and that is driving Chase’s overall monthly balance-repayment rate higher, Chase CEO Jamie Dimon told analysts.
Asked how Chase plans to react to new, lower debit-interchange fees the Fed put into place as a result of a new Federal Reserve rule that goes into effect Oct. 1, Dimon confirmed that the bank has cut its debit-rewards programs and plans to “test various things” to come up with new checking-account fees.
“We’re not going to do anything that’s not consumer-friendly,” he said, noting the bank will “come up with something that will help mitigate (debit-interchange losses) a bit.”
Pressed to provide details, Dimon admitted that shifting debit cardholders to more-profitable payment instruments, such as charge cards, is unlikely because of “a lot of restrictions.” But Chase intends to develop payment products that are superior to those of “some of the nonbank competitors, and (we will) get paid for it,” he said.
Chase expects to report during the fourth quarter of this year a decrease of about $250 million in debit-interchange revenue, which will be “barely mitigated” by other strategies at that point, Dimon said.
Chase’s card-purchase volume during the quarter was “solid” and generally in line with expectations, Jason Kupferberg, a senior analyst with the New York-based equities firm Jefferies & Co., said in a research note.
