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Credit card charge-offs likely will continue to rise at least through the fourth quarter of next year, David Nelms, CEO of Discover Financial Services, told analysts yesterday at the Merrill Lynch Banking & Financial Services Conference in New York. Discover's charge-off rate is in line to reach 5.5% of managed net credit card receivables this quarter and will approach 6% in the first quarter of 2009, said Nelms, who expects "further deterioration" in charge-offs after the first quarter and surmises that charge-offs might hit a peak in next year's fourth quarter. "Consumers are under stress, (and) unemployment is going to rise above 6%," he said. "The economy is in a tight spot." But Discover's charge-offs likely will be lower than competitors' because it has maintained tighter underwriting standards in recent years and has a lower concentration of credit card customers in areas hit hardest by the real-estate downturn, such as California and Florida, Nelms said. "That is no accident. Several years ago we tightened our credit criteria where we saw consumer debt getting out of line with income, and we stopped marketing altogether in some (of those) areas," he said. Many of Discover's freshest charge-offs are coming from customers with high FICO credit scores and strong account-payment histories, Nelms said. "It's people who were doing pretty well on handling credit and lost their jobs," or their home values declined recently, he said. Discover will rely heavily on deposits gathered through its Discover Bank to fund credit card loans. "I don't know when the securitization market will fully recover, but for now we are putting (credit card loans) on the balance sheet and funding them through deposits," said Nelms, who is confident Discover can attract a healthy amount of deposits through savings and certificate of deposit accounts, which has seen significant growth in recent months. Discover probably will not go the route of American Express Co., he said. AmEx this week received permission to become a bank holding company, which will enable it to receive federal bailout funds (CardLine, 11/11). "Converting to a bank holding company is unlikely for Discover," Nelms said. "We have access to various government programs within Discover Bank."
