By AnnaMaria Andriotis
Credit-card losses are mounting, a reversal from a six-year
trend that could be a warning sign for markets and the broader
economy.
The average net charge-off rate for large U.S. card issuers --
the percentage of outstanding debt that issuers write off as a loss
-- increased to 3.29% in the second quarter, its highest level in
four years, according to Fitch Ratings. The quarter was also the
fifth consecutive period of year-over-year increases in the closely
watched rate. All eight large issuers, including J.P. Morgan Chase
& Co., Citigroup Inc., Capital One Financial Corp. and Discover
Financial Services, had increases for the quarter.
The trend, which accelerated in the first half of this year, has
started to suppress bank earnings. If consumers' budgets get more
stretched, a pullback in spending could pressure both growth and
corporate profits.
While losses are rising, they remain low compared with
historical levels and the 10% net charge-off rate they hit in early
2010. Lenders say they aren't expecting a return to crisis-level
losses and the increases are largely a return to normal after a
period of abnormal lows.
Still, other bankers have noted the change in direction, a new
string of losses in the industry after 24 quarters in which they
fell. "The overall environment is deteriorating," said David Nelms,
chief executive at Discover in an interview. It is "not quite as
favorable as it was over the past few years."
In 2010, when credit card write-offs started declining, banks
lent mostly to creditworthy borrowers. But starting around 2014
many lenders loosened underwriting standards substantially, turning
to subprime borrowers with lower credit scores that brought in
higher yields.
That contributed to a new boom in credit-card spending. Card
balances nationwide rose 6% over the last 12 months through May, a
growth rate that is up from about 1% four years ago, according to
the Federal Reserve.
Rising balances, however, have also coincided with the recent
loan losses and, analysts note, put a dent in what has been one of
the healthiest credit-card markets on record.
The missed payments and increase in losses are having knock-on
effects on lenders' earnings. Many posted double-digit percent
year-over-year increases in the money they set aside to cover
future card losses.
Discover shares dropped 4% on Thursday, the day after the
company reported that it increased loan-loss provisions by 55% and
raised guidance for its 2017 overall net charge-off rate. It is
"hard in the short term to grow earnings when credit is moving
against us," Mr. Nelms said.
The rising losses are occurring during a time of near record-low
U.S. unemployment, which suggests that credit performance could
quickly weaken should the jobs situation turn. "That's a little
concerning," said Michael Taiano, a director at Fitch.
During the first-quarter earnings period, some lenders and
analysts pointed to delays in tax refunds as a possible reason for
the pickup in card-related losses. But this quarter, charge-offs
kept rising for many lenders, giving more credence to worries that
consumers are taking on too much debt.
The card market is an indicator of consumers' ability to pay
back their debts. Unlike mortgages, a much broader group of
consumers have access to cards. And these accounts can fall low on
the priority list of bill payments when household finances get
tight.
While overall consumer balance sheets look healthy, according to
Federal Reserve data, some numbers suggest they are starting to
stretch. Balances are growing faster than purchases charged to
retail-store cards from Synchrony Financial and Citigroup Inc.
Card losses in the U.S. are up at most big banks, including
those that specialize in subprime lending or store credit cards.
The net charge-off rate at Capital One in the second quarter
increased more than a percentage point from the year prior.
Citigroup's store card figure increased 0.63 percentage point,
while Synchrony's overall rate rose more than 0.90 percentage
point.
Broader consumer figures also point to overleveraging.
Nonmortgage consumer debt payments, including credit cards and auto
loans, account for the largest share of consumers' after-tax income
since 2009, according to an analysis by Barclays PLC.
So far this year, several card lenders, including Capital One
Financial Corp. and Synchrony, have raised projections for
charge-offs. Investors are jittery about more revisions.
Alliance Data Systems Corp., the third-largest issuer of store
cards by outstanding balances, had been guiding investors to a
full-year 2017 loss rate in the mid-5% range. In July though, it
wouldn't commit to that figure when pressed by analysts on its
earnings call. The company also reported a net charge-off rate for
cards of 6.2% for the second quarter, up 1.1 percentage points from
a year earlier. Its shares plummeted more than 9% that day.
Credit cards also moved to the top of the list of concerns about
potential losses in the Fed's annual stress test of banks in June.
It said banks would incur $100 billion in projected credit-card
losses in a severely adverse hypothetical recession, tied with
commercial and industrial loans. Cards ranked third the year
prior.
"We've seen an inflection point in credit," said Charles
Peabody, managing director at Compass Point Research & Trading
LLC. "It is going to get worse from here."
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
(END) Dow Jones Newswires
July 31, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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