Rising Credit Card Delinquencies, Falling Profits

15. October 2017.

Third quarter 2017 credit card results filter in this week, and issuers are indeed beginning to circle the wagons in anticipation of a rugged 2018. As this story points out, large issuers linked to multi-product financial institutions might weather the storm better than card-focused firms because larger issuers have more complex revenue streams to offset economic change.

Either way, hold onto your hats because we will likely see a material shift in card revenue, risk, and profitability in the coming months.

  • P. Morgan Chase and Citigroup reported solid earnings Thursday but also flashed a warning signal on consumer debt that investors in some other companies should heed.

  • Nevertheless, there was one area that deserves greater investor scrutiny, the continued deterioration in both banks’ U.S. credit-card portfolios. This is more of an issue for Citigroup because its card business tilts more toward somewhat less prime borrowers.

Just about half the US has a credit card with either Citi, Chase or both. Chase has an extensive branch network, built in part by its recession-era purchase of Washington Mutual, but also through branch building. Citi focuses on major cities as it rebuilt its branches after a series of financial challenges. The girth of their card businesses can move the needle on most credit card metrics in the US.

  • At J.P. Morgan, card charge-offs rose to 2.87% of total loans from 2.51% a year earlier. The bank stressed that this increase is well within its expectations, and, indeed, the ratio of losses remains low by historical standards.

  • Citigroup, however, says losses are increasing slightly faster than it had expected. Cards carrying its brand, which generally target less-risky borrowers, saw net charge-offs rise to 2.84% of total loans from 2.25% a year earlier.

  • These levels of losses are easily manageable for megabanks like Citigroup and J.P. Morgan, but the fact that they are worse than anticipated at Citigroup is still worrisome for other lenders who focus more narrowly on credit-card lending.

While Chase and Citi can offset the rise of delinquency and the fall of profit through other operating divisions, this appropriately places concern about those issuers who are focus on some weaker accounts such as Capital One, Synchrony and Alliance data.

  • Worries over credit defaults have dogged the consumer lenders for some time, driving weak share-price performance for all three this year. The numbers reported by their bigger rivals on Thursday suggest these worries are unlikely to fade soon.

The fascinations of mobile banking and payment growth is terrific, but at the end of the day, the credit card business exists to generate interest and non-interest revenue, in search of a profit as we mention in this recent Mercator Advisory viewpoint. The US credit card business experienced significant growth while recovering from the recession. Now is the time to get back to the basics of lending.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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