--Declining delinquency rates may allow lenders to release
additional loan-loss reserves
--Credit quality has improved as borrowers have reined in use of
revolving credit
--Loan growth remains muted
(Updated with details about Citi's card loans in paragraph 13
and closing stock prices in paragraph 21.)
By Andrew R. Johnson
Late credit-card payments declined for major lenders in May,
continuing a steady performance that has been bolstered by recent
signs that the U.S. economic recovery is gradually gaining
traction.
Persistently low delinquency rates have enabled banks to boost
their earnings by releasing funds set aside to cover future losses,
known as loan reserves.
While industry executives have repeatedly predicted the period
of declining losses would end, that has yet to occur, setting up
lenders to continue reaping the financial benefits of consumers'
postcrisis discipline.
"It's hard to envision needing to put reserves up on a card
portfolio," said Donald Fandetti, an analyst with Citigroup Inc.
(C) who follows credit-card lenders. "People default on their cards
when they lose their jobs, and there's modestly better job creation
and the unemployment rate has been stable to down, so it could go
on for a while."
Capital One Financial Corp. (COF), Discover Financial Services
(DFS), J.P. Morgan Chase & Co. (JPM), Bank of America Corp.
(BAC) and Citi said Monday that their credit-card delinquencies
declined in May from April. At the same time, they also said their
net charge-off rates, which measure loans lenders deem
uncollectible, fell during the month.
American Express Co. (AXP), which has enjoyed among the lowest
delinquency and net charge-off rates since the recession thanks to
its focus on more-affluent customers, said its delinquency rate
stayed flat at 1.1% in May while its net charge-off rate declined
to 1.9% from 2.1% in April.
The results were disclosed in monthly filings with the
Securities and Exchange Commission.
Historically, major credit-card lenders have experienced
delinquency and loss rates between 3% and 5% on average during what
analysts consider to be a "normal" economic environment.
Last year, many card executives said they expected improvements
in loan quality to wane because there was little room for further
improvement. The fact that rates remain below that range for many
credit-card issuers means they will likely be able to continue
releasing reserves in the coming quarters, Mr. Fandetti said.
Gordon Smith, chief executive of consumer and community banking
for J.P. Morgan, said this month during an investor presentation
that the bank expects to reduce loan-loss reserves by more than $1
billion this year in its cards business. The company had previously
estimated it would release as much as $1 billion in loss reserves
for the year.
The delinquency rate for J.P. Morgan's securitized card loans
fell to 1.6% in May from 1.7% in the previous month, it said
Monday. Its net charge-off rate fell to 3.34% from 3.49%.
Capital One's delinquency rate for U.S. card loans was 2.97% in
May, down from 3.14% in April. Its net charge-off rate fell to
4.17% from 4.61%. Discover's delinquency rate fell to 1.6% from
1.7%, while its net charge-off rate fell to 2.2% from 2.3%.
Bank of America said its delinquency rate for securitized card
loans declined to 2.6% from 2.72%, and its net charge-off rate fell
to 4.03% from 4.55%. Citi's delinquency rate for securitized card
loans fell to 1.99% from 2.1%, and its net charge-off rate fell to
3% from 3.11%.
By continuing to release loss reserves, lenders are able to
compensate for muted loan growth, which is the key driver of
revenue growth for most credit-card issuers.
The size of many lenders' credit-card portfolios has shrunk over
the past two years because borrowers are reluctant to carry large
balances from month to month. Instead, many consumers have opted to
pay down their balances to avoid racking up debt.
The exception has been Discover and American Express, which have
outpaced the industry in terms of loan growth. Both say they have
grabbed market share from other credit-card issuers, which has
helped increase their loan portfolios.
American Express says it is generally less affected by a
slowdown in consumer borrowing because it focuses more on
"transactors," or customers who use their cards frequently,
generating revenue from transaction fees that merchants pay, but
pay off in full each month. That makes it less reliant on interest
and other fees that banks charge customers who carry balances each
month.
Barclays analyst Mark DeVries downgraded American Express to
equal weight from overweight on Friday, citing the stock's current
valuation and prospects of slower growth in the business.
Mr. DeVries said in a research note he sees more "modest"
potential upside to his new price target of $82.
"Post financial crisis, [American Express] has redirected growth
initiatives to higher-multiple businesses, but has also become a
more capital-intensive" business with "slightly diminished growth
prospects," Mr. DeVries said.
American Express's shares closed up 1.2% at $73.84 on Monday,
while Capital One's shares closed up 1.6% at $62 and Discover's
shares closed up 0.1% at $47.40. Shares of J.P. Morgan, Bank of
America and Citi also closed up.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires