The steady decline in credit card charge-offs that continued through the first quarter helped make issuers’ earnings look good, but that trend cannot continue forever, Fitch Ratings Inc. warned in a May 6 special report.
The average charge-off rate during the quarter for the seven largest U.S. credit card issuers was 6.34%, 345 basis points below the average loss rate of 9.79% a year earlier and 82 basis points below 7.16%, their average loss rate during the fourth quarter of 2010, Fitch said.
The top seven issuers Fitch tracks include American Express Co., Bank of America Corp., Capital One Financial Corp., Citigroup Inc., Discover Financial Services, JPMorgan Chase & Co. and U.S. Bancorp.
The average credit card charge-off rate during March for all U.S. credit card issuers Fitch tracks was 7.88%, down 43 basis points from 8.31% in February and 305 basis points lower than 10.93% a year ago.
The delinquency rate on all U.S. credit card accounts at least 60 days past due in March hit 2.93%, down 18 basis points from 3.11% in February, marking its lowest point in three years, Fitch said.
The decline in charge-offs caused most large card issuers to reduce their loan-loss provisions by double-digit millions, enabling them to report first-quarter segment profitability, with returns on average managed receivables averaging 4.38% on an annualized basis, according to Fitch.
But the effect of lower loss provisions from falling loss rates ultimately is unsustainable, the firm said.
As asset quality stabilizes, “growth in card earnings will then be more dependent on profitable portfolio growth, which will depend on consumer demand for credit and the competitive pricing environment,” Fitch said.
And credit card portfolio growth, pricing and marketing strategies “have yet to be really tested” in the wake of last year’s implementation of the Credit Card Accountability, Responsibility and Disclosure Act, as “issuers are only now starting to think about portfolio growth,” Fitch said.
Overall consumer revolving credit continues to decline, which Fitch said reflects a decline in credit availability related to declining real-estate values and home equity but also to a drop in consumer demand for credit.
“Credit card issuers have increased marketing activity rather significantly in recent quarters, signaling an appetite for growth, but higher consumer savings and continued deleveraging will be a challenge for portfolio expansion,” Fitch said. In addition, “many issuers have focused increasingly on transactors, which tend to repay their balances every billing cycle,” according to Fitch.
Looking ahead, Fitch believes delinquency rates are unlikely to fall significantly from current levels, but credit card loss rates are likely to fall further, “which should yield additional reserve releases and improved profitability near term.”
