Paradox: Consumer Credit Losses Up; Yet, More and More Major Banks Today Aggressively Seek Consumer Borrowers
Weinstein, Michael, American Banker
Paradox: Consumer Credit Losses Up
Yet, More and More Major Banks Today Aggressively Seek Consumer Borrowers
Consumer credit losses are up sharply at many of the nation's leading banks at a time when banks are lending more and more of their dollars to consumers.
In most cases, bad credit card debt is the biggest factor in higher loan losses. Lured by high profits, banks have promoted plastic aggressively to consumers around the country, turning up plenty of poor credit risks in the process.
But analysts do not anticipate a consumer debt crisis as long as the economy remains healthy. Overzealous credit card lenders, however, may take big hits, they say.
Meanwhile, big banks are expected to continue their emphasis on retail lending even though loan losses may be even higher this year.
Consumer lending, which has outpaced overall bank lending for three years now, appeals to banks for a number of reasons.
Sluggish demand and fierce competition in the commercial lending business has severely cut the profitability of making loans to big companies.
And banks have cut back on their international lending. "With that option being curtailed, banks in general are increasingly coveting the consumer,' said Thomas H. Hanley, the director of the bank research department at Salomon Brothers Inc.
And credit cards have been a favored method for reaching consumers.
"There is no doubt about it that the fastest area of growth over the last couple of years, and especially during '85, was in the consumer loan category in general, and particularly credit cards,' Mr. Hanley said.
Consumer loans are also more profitable than other types of lending. "The principal concern in beefing up the consumer lending is that the spread was there,' said John J. Lyons, managing principal of Lyons, Zomback and Ostrowski Inc., a New York City consulting firm.
Banks typically are charging less than 100 basis points above their cost of funds on loans to big commercial customers, while the spread on credit card loans can be 900 basis points.
Consumer lending profits are so high that banks can weather inordinately large loan losses. Last year, credit card chargeoffs were slightly more than 3% of outstanding loans at the leading credit card banks, according to James J. McDermott Jr., senior vice president at Keefe, Bruyette & Woods Inc.
And analysts see that ratio rising this year--perhaps to around 4%.
"Some institutions will be able to withstand those losses and be able to generate huge levels of profits,' said Joel P. Friedman, director of strategic management for Arthur Andersen & Co. in San Francisco. "Others are really going to suffer.'
Loan Losses Up at Citicorp, Elsewhere
At Citicorp, the nation's biggest issuer of bank credit cards, unsecured personal loans generated a loan-loss ratio of 3.8% in 1985, compared with 2.5% in 1984. "A large portion [of losses] was due to our aggressive bank card solicitations,' said Richard S. Braddock, Citicorp's sector executive in charge of consumer banking, in the corporation's 1985 annual report.
Citicorp has marketed credit cards actively for the last two years, attracting six million new accounts in that time. These accounts represent two-thirds of Citicorp's nine million MasterCard and Visa accounts. …