The card industry appears to be ever-so-slowly emerging from its harshest credit cycle.
Credit losses remained heavy across the board in the third quarter, but in conference calls this month, some issuers were, if not upbeat, at least neutral in their interpretation of a recent reprieve from chargeoffs.
Bank of America Corp., which posted the highest chargeoff rate for the quarter among the five largest issuers, declared that the buildup in its bad loans has "plateaued." JPMorgan Chase & Co., meanwhile, emphasized the pain ahead.
Capital One Financial Corp. projected a peak in the dollar amount of its credit losses in the "next couple of quarters" and a peak in the chargeoff rate after that because its portfolio is shrinking.
But "nearing a peak does not necessarily mean that we're nearing the beginning of a robust recovery," CEO Richard Fairbank said. His company expects unemployment to "remain stubbornly high throughout 2010."
JPMorgan Chase CEO James Dimon, who described work on new products and the company's capacity to distribute through its large branch network, said, "What we are doing in the card business is really looking past 2010."
Pressed about the future of his company's card business in light of credit losses that were worse than those at competitors, B of A CEO Kenneth Lewis cited the sea change in industry regulation and said, "It would be premature to tell you what it will look like in any exact form. But it is going to be different. We acknowledge that, and we are working on it."
B of A cut the net loss at its credit card business by 35.9% from the previous quarter, to $1 billion, as it allowed its provision to drop by about $600 million, excluding the impact of maturing card securitizations.
The net loss at JPMorgan Chase's card unit widened by 4.2% from the previous quarter to $700 million as it enlarged its allowance by 5.2%, to $9.3 billion. The company predicted results could be substantially worse in the first half of next year.
American Express Co.'s loss rates appear to have rounded the corner, and the company said it expects credit expenses to continue to fall this quarter and that it is increasingly focused on growth opportunities. But chief financial officer Daniel Henry said a return to "more normalized core earnings" would not occur until two things happen: healthy growth in gross domestic product, which spending volumes have historically mirrored; and a moderating of credit loss rates. Such moderation took hold over six or eight quarters after the last two down cycles in the early part of this decade and the early 1990s.
Capital One projected that its chargeoff rate would continue to increase this quarter. But the McLean, Va., company stood out for its confidence over its ability to work through and emerge from the regulatory overhaul with its profitability intact.
"The more we have really gotten our head around the Card Act and what are its many, many impacts on how the business works and on us, I think we are increasingly bullish that ... you are not going to see a big striking effect once the Card Act goes into effect," Fairbank said.
Revenues, as a percentage of average domestic credit card balances, jumped 230 basis points from the previous quarter to 16.8% at Capital One, in part because of price increases the company implemented earlier in the year. It projected that the margin would stay above 16% this quarter and be close to that mark next year.
Fairbank has pointed to the "go-to rate" - the core interest rate on card accounts after teaser periods expire - as a key indicator of the future of the industry. Higher initial pricings are needed to offset the outlawing of penalty increases. He said that after adjusting for changes in the prime rate, there has been an industrywide increase of about 300 basis points in the go-to rate since the summer of 2008.
The industry is in the "early stage of recognition that the go-to rate is the defining kind of indicator of origination pricing health," he said, though he believes "it needs to go quite a distance farther to really get to the kind of destination we would look for."
The pace of increase in chargeoff rates slowed sharply in the third quarter, and some card businesses even posted absolute declines.
But though job losses have subsided sharply and transient factors like tax refunds and government distributions became apparent in lower delinquency rates in the spring, a number of forecasters expect that industrywide chargeoffs will not peak until next year, roughly in tandem with unemployment.
The chargeoff rate for securitized receivables across the industry fell for the first time this year in July, but rebounded 83 basis points in August, only to drop by 57 basis points and land at 10.2% in September, according to Barclays Capital Inc.
In a report this month, analysts with the investment bank predicted that chargeoffs would "resume their upward march shortly, peaking sometime in" the first quarter at 11% to 11.5%. The analysts cited a 15-basis-point increase in the proportion of balances overdue by more than 30 days to 5.67% in September, which they wrote was just ahead of a seasonal pattern of deterioration that typically takes hold late in the year.
Changes in the proportion of accounts overdue by more than 30 days typically feed into chargeoff rates about four months later, as accounts fall further behind and are ultimately deemed uncollectible, the Barclays analysts wrote. Because delinquencies moderated earlier in the year, the analysts predicted that chargeoff rates would continue to decline "over the next month or so" but subsequently track a rise in delinquencies through the end of the year.
B of A's chargeoff rate increased 117 basis points from the previous quarter to 12.9%. That was a far bigger rise than at its largest competitors and gave it the worst chargeoff rate overall. But it was also a smaller increase for the company than the second quarter's 311 basis points and the first quarter's 146 basis points.
The proportion of the $2.3 trillion-asset Charlotte banking company's accounts overdue by more than 30 days fell by 29 basis points from the previous quarter to 7.4% in the third quarter. It cited the decline as the reason for the $600 million reserve release.
In North America, the chargeoff rate for Citigroup Inc.'s portfolio of credit cards that carry its own brand fell 11 basis points from the previous quarter to 10.15% in the third quarter. In its portfolio of cards that it issues for retailers and others - which it has placed in Citi Holdings, a repository for assets it wants to divest - the chargeoff rate fell 86 basis points, to 13.3%.
John Gerspach, Citi's chief financial officer, said performance in the "retail partners" portfolio has been quicker to respond to steps like tighter underwriting standards, credit line reductions and price increases. That is because balances and lines are smaller than in the Citi-branded portfolio and the cards typically do not stay in circulation as long.
Delivering on its July forecast that writeoffs had peaked in the second quarter, Amex posted a 110-basis-point decline in the chargeoff rate for its U.S. credit card portfolio, to 8.9% in the third quarter.
The company's provision for credit card loan losses fell 24.6% from the previous quarter but increased 5% from the year prior to $973 million.
With lower chargeoffs, the company built its reserves by 4.3% from the previous quarter to $3.4 billion.
As credit quality has fallen apart, modification and forbearance efforts have ramped up and introduced considerable play into credit performance metrics.
JPMorgan Chase projected that a "payment holiday" the company offered in May - minimum payments were reduced to nothing for the month, though finance charges continued to accrue - would temporarily improve credit quality measures, with the chargeoff rate falling to about 9% in the fourth quarter and then jumping to about 11% in the first quarter. But "the underlying dynamic is the advancing towards 10.5% as a true core number" that the company had forecast would be reached by the middle of the year, said Michael Cavanagh, JPMorgan Chase's CFO. (That forecast excluded the receivables it acquired last year with the banking operations of Washington Mutual Inc.)
Amex said its credit performance has been improved by a change in the policy it uses to determine when to reset late accounts to current, which it said brings it more into line with the rest of the industry.
Henry said the change allows the company "to keep certain customers in the franchise," and "even if we don't keep them in the franchise forever, it will enable us to have greater collections than we would've otherwise had if we stayed with our older policies."
Fairbank said Capital One had been surprised by a recent slowdown in the rate at which accounts flow into late stages of delinquency, which he said was a reversal of the trend that has prevailed for most of the downturn.
He said the company has shifted the focus of its collections efforts to accounts that are further behind. The new approach "causes an increase in early-stage delinquencies," but Capital One believes "there's a net positive on chargeoffs," he said.
B of A's CFO, Joe Price, insisted that improvement in credit measures from modifications was an accurate reflection of performance, since late borrowers would have to make payments on time under new terms for three or four months before their balances would be reclassified as current.
But Citi's Gerspach said the effect of forbearance measures had become apparent in reducing the percentage of Citi-branded accounts that were overdue, but not in chargeoffs. "While we are preventing more accounts from ever becoming 90 plus days past due, once an account reaches that stage, we have fewer options for addressing the borrowers' credit issues," he said.
Portfolios generally continued to contract in the third quarter, with issuers citing factors like lower consumer spending and demand for loans, chargeoffs and more cautious lending.
Fairbank said Capital One might see "opportunities to increase originations" in the next few quarters, but expects receivables to decline this quarter and into next year because of "weak demand from creditworthy borrowers," among other factors.
But Amex was not the only issuer that said it is looking to ramp up marketing and efforts to acquire new cardholders. Dimon said JPMorgan Chase had increased its marketing budget for the card business in 2010 "by several hundred million dollars."
"The first thing is to get our own model right, own products and services and make sure we adjust to the new laws and things like that," he said. "If we think we have that right, we could be very aggressive in the marketing side."
Fairbank said the industry as a whole - including Capital One - has been turning its sights on big-spending, highly creditworthy customers.
"This will be intensely competitive," he said.
