DFS Discover Financial Services

America's growing thrift is proving to be a drag for credit-card lenders.

Since the height of the financial crisis, a big worry for lenders was that cardholders were falling behind on payments or defaulting on them altogether. As those trends stabilize, a new problem is emerging for card issuers, which profit by collecting interest on unpaid balances: U.S. borrowers, emerging from the recession, are paying off their credit-card debt more quickly.

That could mean trouble for card issuers such as Capital One Financial Corp. (COF), Citigroup Inc. (C), Bank of America Corp. (BAC), American Express Co. (AXP), Discover Financial Services (DFS) and J.P. Morgan Chase & Co. (JPM), as they struggle with declining revenue stemming from lower card loan balances.

Card users paid back 19.02% of their balances on average in June, up from 17.1% a year earlier, according to a Fitch Ratings index, which tracks about $231 billion of credit card loans.

"There's a noticeable increase in payment rate," says Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "This definitely results in lower income because [the card issuers are] collecting lower interest income."

Sakhrani notes that the average life of a credit-card loan was shorter at 5.5 months in June, compared with 6.7 months a year ago.

Lower payments and higher card loan balances are actually desirable for card issuers in a stable economy; when customers pay a minimum balance each month, issuers collect more interest on the unpaid balances.

Card issuers have traditionally replaced lost interest revenue by increasing late-payment fees and raising interest rates for customers unable to pay their bills in full. But new rules that kicked in earlier this year have curbed interest rate increases and restricted the ability of these companies to charge fees, such as those hitting card users exceeding their credit limit or paying late.

It's "more of an uphill battle for card issuers to grow revenue," says Scott Valentin, an analyst at FBR Capital Markets.

According to the Federal Reserve, borrowers reduced their revolving credit lines--mainly card balances--by about $4.5 billion in June, or at an annualized rate of 6.5%. Since the end of 2008, they have cut those balances by about $131.6 billion.

Lower card loan balances took a bite out of income for issuers in the second quarter. At Capital One, revenue fell 9% in the second quarter from the first quarter to $3.9 billion as average loan balances declined 4.5%.

"Consumer de-leveraging by definition means that consumers are paying down debt rather than spending and borrowing," said Richard Fairbank, Capital One's chief executive, after the bank reported second-quarter results in July. "While this pressures loan growth, it also contributes to the improvement in delinquencies and charge-offs."

For J.P. Morgan, revenue at its credit-card unit fell 13% in the second quarter from a year ago to $4.2 billion. Its card balances fell 16% to $146.3 billion during the same period.

Similarly, second-quarter revenue at Bank of America and Citigroup's credit-card units fell amid lower card loan balances. A spokesman for J.P. Morgan declined to comment, while officials from Bank of America and Citigroup were unavailable for comment.

"Overall, we see current payment rates rising toward historic levels," says Leslie Sutton, a spokeswoman for Discover. Revenue fell 3% at the company to $1.59 billion in the fiscal second quarter as loan balances fell by the same percentage. Discover and its bigger rival, American Express, both issue credit cards and process transactions.

For American Express, consumers paying off their card balances more quickly may prove to have a silver lining as the company issues charge cards, which must be paid off each month, as well as credit cards that allow customers to carry a balance. AmEx's revenue rose 13% to $6.86 billion in the second quarter, aided in part by higher cardholder spending. That was offset by lower card balances, which fell 9% to $57.3 billion during the period.

"What we are seeing is a strong rise in spending. At the same time consumer borrowing has been flat to down," says Michael O'Neill, an AmEx spokesman. "That's largely a function of households managing their finances very carefully. That's a trend we anticipated coming out of the recession, and one of the reasons we focused on our charge-card portfolio."

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

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