Magazine article American Banker

3Q RESULTS: Credit Card Industry Is Turning around at Speed of a Battleship

Magazine article American Banker

3Q RESULTS: Credit Card Industry Is Turning around at Speed of a Battleship

Article excerpt

Byline: Harry Terris

The card industry appears to be ever-so-slowly emerging from its harshest credit cycle.

Credit losses remained heavy across the board in the third quarter, but in conference calls this month, some issuers were, if not upbeat, at least neutral in their interpretation of a recent reprieve from chargeoffs.

Bank of America Corp., which posted the highest chargeoff rate for the quarter among the five largest issuers, declared that the buildup in its bad loans has "plateaued." JPMorgan Chase & Co., meanwhile, emphasized the pain ahead.

Capital One Financial Corp. projected a peak in the dollar amount of its credit losses in the "next couple of quarters" and a peak in the chargeoff rate after that because its portfolio is shrinking.

But "nearing a peak does not necessarily mean that we're nearing the beginning of a robust recovery," CEO Richard Fairbank said. His company expects unemployment to "remain stubbornly high throughout 2010."

JPMorgan Chase CEO James Dimon, who described work on new products and the company's capacity to distribute through its large branch network, said, "What we are doing in the card business is really looking past 2010."

Pressed about the future of his company's card business in light of credit losses that were worse than those at competitors, B of A CEO Kenneth Lewis cited the sea change in industry regulation and said, "It would be premature to tell you what it will look like in any exact form. But it is going to be different. We acknowledge that, and we are working on it."

B of A cut the net loss at its credit card business by 35.9% from the previous quarter, to $1 billion, as it allowed its provision to drop by about $600 million, excluding the impact of maturing card securitizations.

The net loss at JPMorgan Chase's card unit widened by 4.2% from the previous quarter to $700 million as it enlarged its allowance by 5.2%, to $9.3 billion. The company predicted results could be substantially worse in the first half of next year.

American Express Co.'s loss rates appear to have rounded the corner, and the company said it expects credit expenses to continue to fall this quarter and that it is increasingly focused on growth opportunities. But chief financial officer Daniel Henry said a return to "more normalized core earnings" would not occur until two things happen: healthy growth in gross domestic product, which spending volumes have historically mirrored; and a moderating of credit loss rates. Such moderation took hold over six or eight quarters after the last two down cycles in the early part of this decade and the early 1990s.

Capital One projected that its chargeoff rate would continue to increase this quarter. But the McLean, Va., company stood out for its confidence over its ability to work through and emerge from the regulatory overhaul with its profitability intact.

"The more we have really gotten our head around the Card Act and what are its many, many impacts on how the business works and on us, I think we are increasingly bullish that ... you are not going to see a big striking effect once the Card Act goes into effect," Fairbank said.

Revenues, as a percentage of average domestic credit card balances, jumped 230 basis points from the previous quarter to 16.8% at Capital One, in part because of price increases the company implemented earlier in the year. It projected that the margin would stay above 16% this quarter and be close to that mark next year.

Fairbank has pointed to the "go-to rate" - the core interest rate on card accounts after teaser periods expire - as a key indicator of the future of the industry. Higher initial pricings are needed to offset the outlawing of penalty increases. He said that after adjusting for changes in the prime rate, there has been an industrywide increase of about 300 basis points in the go-to rate since the summer of 2008. …

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