Magazine article American Banker , Vol. 174, No. 18
Byline: Harry Terris
Rapidly deteriorating employment conditions are propelling losses on card receivables into unfamiliar territory.
In fourth-quarter reports, major issuers said they are working under forecasts that joblessness will reach levels not seen in almost three decades, making the last two recessions uncertain guides.
The issuers either ratcheted up their projections for credit losses or did not provide firm targets.
Other clouds have also formed. Strained consumers are paying off card debts more slowly, working against efforts by lenders to rein in risk. Declining spending, which means less interchange income, is hitting American Express Co., which runs its own network, particularly hard. And a range of regulatory, accounting, and legislative changes - including the possibility that Congress will let bankruptcy judges modify mortgages on primary residences, prompting a rise in filings and defaults on other forms of debt - threaten to add to the pressure.
"Credit cards started to fall apart and see problems long after the mortgage problems started," said John Williams, an analyst at Macquarie Group. "So it's not unreasonable to make the argument that this is still in a somewhat earlier stage than real estate is at this point, and there may be a lot more to go."
During the fourth quarter the chargeoff rate on Citigroup Inc.'s portfolio of cards bearing its name (rather than private-label ones it issues for retailers) surpassed the peak of 6.44% after the early 1990s recession.
"It is unclear how closely credit loss behavior in the current recession will correlate with the 1990s recession," Gary Crittenden, Citi's chief financial officer, said on its fourth-quarter conference call this month. The New York company also said its portfolio was flat from the third quarter but fell 3.5% from a year earlier, to $151 billion; drops in purchase volume and balance transfers were offset by declining payment rates.
Richard Fairbank, the chief executive of Capital One Financial Corp., said during its call that during the last two recessions growth in the industry's receivables slowed, but there was still growth.
By contrast, in the current downturn, "you're going to see a lot less in the way of growth and maybe a fair amount of decline this time," he said.
Sanjay Sakhrani, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., said he expects the industry's chargeoff rates to surpass those seen during the last two recessions, because of the bleaker employment outlook. But he also said issuers already enjoy substantial support from the government, "and some of the businesses that may have faltered previously probably won't."
Capital One raised its projection for this quarter's chargeoff rate from about 7.5% to about 8.1%. It said the more severe forecast was the result of declining receivables and the deterioration of closed-end unsecured loans - a business it mostly ended at the beginning of last year.
"We can't be certain how much or for how long these economic headwinds will continue to impact our credit performance and outlook," said Gary Perlin, Capital One's CFO. Its fourth-quarter chargeoff rate increased 95 basis points from the third quarter and 224 basis points from a year earlier, to 7.1%, in line with the guidance it gave in October.
Managed receivables increased 2.3% from the third quarter and 1.8% from a year earlier, to $71 billion. Mr. Fairbank said the growth was driven by "weak but still positive seasonal balance growth, a decline in payment rates, and fewer balance transfers away" from the company.
Capital One's provision for losses in its credit card business increased 61.3% from the third quarter and 67.4% from a year earlier, to $2 billion, as the company built its overall reserves by $1 billion in anticipation of the unemployment rate hitting 8.7% by yearend.