US credit-card losses are falling faster than expected, with the six largest card issuers expected to earn nearly $10 billion more in the coming 12 months than predicted, says a study by Moody’s.
Historically, US credit-card write-offs have tracked the unemployment rate. But for the first time in a decade, loans considered uncollectible by lenders are falling faster than the jobless rate, prompting analysts to revise earnings models.
The divergence from past experience reflects bank efforts to weed out risky borrowers, moves by consumers to pare back debts after the excesses of the past decade and new credit card rules intended to discourage reckless lending.
“We are getting back to an old-fashioned basis of lending, providing credit only to people who have the ability to repay,” said Curt Beaudouin, an analyst at Moody’s.
The agency expects the six leading credit card issuers to earn nearly $10bn more in pre-tax profits in the 12 months from July than it forecast in March: $2.7 billion for Citigroup; $2.6 billion for JPMorgan Chase; $2.5 billion for Bank of America; $931 million for Capital One; $552 million for American Express and $658 million for Discover.
However, the improving picture for banks highlights the macro-economic dilemma faced by US policymakers, because it points to continuing limits on consumer credit and a corresponding weakness in demand.
“The tightening of lending standards by credit-card issuers in combination with a trend to deleverage by US consumers will have major ramifications going forward for economic growth,” Mr Beaudouin said.
The Federal Reserve’s statistics on credit card loss rates show only two previous instances when they did not track the unemployment rate: the mid-1990s when issuers expanded into subprime debt, and a decade later when rules made it harder for borrowers to file for bankruptcy protection.
During the 1991 and 2001 recessions, write-offs did not start falling until unemployment abated. However, Moody’s expects credit-card write-offs will fall from 9.3 per cent in July to 6 per cent in a year’s time. It expects unemployment to remain above 9 per cent during that period.
“It’s a surprise,” said Beth Ann Bovino, a senior economist at Standard & Poor’s. “Those two readings tend to go hand in hand.”
Credit-card loan balances at the six lenders have dropped 20 per cent since their peak in the second quarter of 2008, to $544 billion, according to Credit Suisse. The six lenders reported combined pre-tax profits of $28 billion in the 12 months ending in June, making the additional $10bn in anticipated pre-tax profits from credit cards significant. Citigroup was the only one to lose money, with a $6.8 billion pre-tax loss.