1Q Net Income At Citi's Card Unit Falls 66% From Year Ago
17 Aprile 2009 - 10:23PM
Dow Jones News
The latest quarterly results from some of the biggest U.S.
issuers of plastic open a window into the rough road ahead for
credit card companies.
Even as Citigroup Inc. (C) swung to a $1.6 billion first quarter
profit Friday, on the heels of a $17.5 billion loss in the fourth
quarter, net income at its card segment fell 66% from a year
earlier to $417 million.
Citigroup's results, in addition to the dour outlook Thursday
from card issuer JPMorgan Chase & Co. (JPM), are a stark
reminder of continuing pain in this sector as growing numbers of
cash-strapped and jobless borrowers are unable to make their
monthly payments. And with unemployment expected to tick higher
amid the ongoing recession, a quick turnaround in credit cards
appears unlikely.
"People were hoping losses are bottoming out," says Scott
Valentin, an analyst at FBR Capital Markets. "But with unemployment
higher, there are a lot of issues for credit card companies to deal
with, including higher losses and greater reserves."
U.S. employers shed 663,000 jobs in March, pushing the nation's
unemployment rate, at 8.5%, to its highest level since 1983. The
worsening trend in plastic means additional misery for financial
firms, such as Capital One Financial Corp. (COF) and American
Express Co. (AXP), who are reporting their quarterly results next
week.
Citigroup said losses stemming from souring card loans globally
rose to $1.94 billion in the first quarter, a 56% jump from a year
ago. At the same time, the card issuer squirreled away $1.11
billion to reserve against potential losses, compared with $623
million a year earlier.
The company's so-called private-label credit card portfolio also
experienced a steep rise in credit losses, at 12.40%, compared with
7.32% a year earlier. As of March 31, Citigroup had $152.7 billion
of card loans, including $55.9 billion in private-label cards, on
its books and bundled into debt securities. Unlike general-purpose
cards branded by Visa Inc. (V) or MasterCard Inc. (MA) that can be
used almost anywhere, private-label cards can be used only in
specific stores.
Private-label cards traditionally have higher loss rates than
general-purpose cards, in part, because cash-strapped consumers are
likely to put their monthly private-label statements at the bottom
of the bill pile. Although retailers may help to pitch the cards to
customers and arrange marketing programs for them, it is the
private-label issuer, in this case, Citigroup, that bears the
financial responsibility of owning the loans.
"We think credit card companies underestimated how fast
unemployment is increasing," says FBR's Valentin.
JPMorgan, whose credit card business generated its second
consecutive quarterly loss Thursday, said the unit is likely to
remain unprofitable this year.
Earlier this week, Capital One reported a sharp increase in
credit card loan losses in March as part of a monthly report card
on the performance of securities made up of card loans.
Monthly data from another card company, Discover Financial
Services (DFS), indicate the rate at which credit card users are
paying back their outstanding balances each month remains near a
five-year low at 18.45% in March. A sustained decline in the amount
borrowers repay each month is a leading indicator of credit losses.
Analysts are concerned that more customers won't be able to pay at
all, forcing issuers to write off loans. This would mean heavier
losses on credit card debt already battered by rising
unemployment.
In a reflection of deteriorating credit quality, JPMorgan's
first-quarter results Thursday indicated the increasing inability
of strapped borrowers to keep up with their card payments. A total
of 6.16% were at least 30 days behind their payments in the first
quarter compared with 3.66% a year ago, and 4.97% in the fourth
quarter. The net charge-off rate - or the percentage of loans
deemed uncollectible - was 7.72%, up from 4.37% last year, and
5.56% in the fourth quarter.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com