DFS Discover Financial Services

With delinquency rates for most U.S. issuers of credit cards dropping to their lowest point in 2010, the challenge for these companies is to increase lending amid stricter rules on card fees.

Monthly data for December released Tuesday by issuers including Capital One Financial Corp. (COF), American Express Co. (AXP), Discover Financial Services (DFS), Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM), indicate that the worst of the credit problems is behind them, although losses from souring loans remain steep.

Now, the lenders need to increase the size of their loan books.

The more that cardholders charge on their plastic, the more the companies earn by way of fees, so the amount customers spend is critical. Card-loan balances--and, as a result, revenue--have been falling as companies, stung by steep losses during the economic slump, scaled back on credit and toughened lending standards.

Credit-card issuing banks are also facing an erosion in profits and revenue stemming from new expansive rules curbing income on credit and debit cards.

At Capital One, a card-lender-turned-bank, U.S. card loans at least a month behind payments fell to 4.09% in December from 4.26% in November. Charge-offs in its U.S. credit-card business dropped to an annualized 7.01% last month from 7.56% in November, according to a regulatory filing Tuesday with the U.S. Securities and Exchange Commission. Its shares were down 0.8% to $48.02 in afternoon trading.

Charge-offs are loans that a card issuer deems uncollectible because borrowers can't repay them; they are based on past delinquent balances. Delinquencies are loans that may be written off in the future. The delinquency rate is important because higher delinquencies force issuers to squirrel away capital to cover potential losses.

At American Express, which has an affluent cardholder base, the 30-day delinquency rate continued to fall. In an SEC filing Tuesday, the company said delinquency rates fell to 2.1% in the fourth quarter, according to preliminary data, from 2.5% in the third quarter. AmEx wrote off an annualized 4.4% of its U.S. card loans for the quarter ended Dec. 31, also according to preliminary data, down from 5.2% in the third quarter. It shares recently traded at $46.35, up 0.2%.

Discover said charge-offs in December totaled 5.94% of credit-card loans that have been packaged into bonds, down from 6.72% in November. The 30-day delinquency rate fell to 3.91% last month from 4.15% in November. Its shares rose 1.5% to $20.68. Discover and its bigger rival, American Express, also process card transactions in addition to issuing credit cards.

J.P. Morgan Chase, which reported fourth-quarter results Friday, said charge-offs for the quarter fell to 7.08% from 8.06% in the third quarter. In the same period, the 30-day delinquency rate fell to 3.66% from 4.13%. The shares were little changed at $44.92.

Bank of America, at a write-off rate of 9.31% in December, had the highest among its peers. But the rate was lower than the 9.92% in November. Bank of America has consistently reported a higher write-off rate than other major U.S. card issuers. Total delinquencies were lower at 5.24% last month compared with 5.47% in November. Bank of America shares recently traded at $15.01, down 1.6%.

Citigroup Inc. (C) said Tuesday it wrote off 7.84% of its managed card loans in the fourth quarter, down from 8.69% in the prior quarter; its stock was down 5.3% at $4.86 as its fourth-quarter results, reported earlier Tuesday, missed Wall Street expectations.

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

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