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The credit card industry could slip into the red this year as economic conditions tighten issuers' profit margins, according to a new report TowerGroup Inc. released last week. TowerGroup, an independent research firm owned by MasterCard advisors, also predicts that new credit card rules going into effect next year will force issuers to further slash cardholders' credit limits. "Issuers have a huge level of contingent liability right now from card customers' unused credit lines," Brian Riley, a TowerGroup research director and co-author of the report, tells CardLine. "At least two more rounds" of credit-line reductions will occur in the next several months, Riley says. Card issuers during the first quarter of this year reported their first negative annualized return on assets since the 1970s, and current trends suggest the industry will be unprofitable this year, the report suggests. The key factors hammering profits include record charge-off rates combined with a shrinking level of revolving credit card balances. Lower overall consumer spending and a shift in credit card use to debit cards also is depressing credit card industry earnings, according to the report. The industry's total amount of revolving credit card balances decreased at an annualized rate of 11% through April of this year, the report notes. "If present trends continue, none of the major credit card issuers is likely to make money this year," Riley says. In June, analysts at Keefe, Bruyette & Woods suggested credit card issuing would become a smaller and less profitable industry once the new card rules take effect, though credit cards "will continue to provide one of the most-lucrative returns of the asset classes within banks' portfolios." (CardLine, 6/29). Those profits will be built upon more-restrictive, less-generous deals for cardholders, the Keefe, Bruyette analysts wrote. U.S. issuers of Visa- and MasterCard-branded credit cards posted a collective after-tax profit/return on assets of $17.71 billion, or 2.48% of average outstandings. That represents a 2.9% drop from the previous year's collective profit of $18.25 billion, or 2.71% of average receivables, according to the 2009 Bankcard Profitability Study and Annual Report produced by Cards&Payments, a CardLine sister publication (CardLine, 5/12).
