Magazine article American Banker

Recovering Bad Card Debts Feeds Issuersi?1/2 Profits I?1/2 for Now

Magazine article American Banker

Recovering Bad Card Debts Feeds Issuersi?1/2 Profits I?1/2 for Now

Article excerpt

Byline: Harry Terris

Recoveries against bad loans have become a major source of cash for credit card issuers, and hence an increasingly important factor in the industryas return to pre-recession loss rates.

This money, once written off as uncollectible, is salvaged through means like court judgments against debtors and sales of claims to collections agencies. But collections are a wasting resource: the massive reservoir of charged-off paper is aging, which will make it harder to make good on these claims. Thatas not to mention the intensifying scrutiny of the collections industry from authorities concerned about potentially widespread documentation problems.

Recoveries have held steady or climbed at some of the largest issuers. At Discover Financial Services, the value of card loans written off as uncollectible fell by half to $550 million in the third quarter of last year from from about $1.1 billion in the second quarter of 2010, according to regulatory financial reports.

Meanwhile, recoveries jumped by about a quarter to $146 million over the same time. Thus, in the third quarter, recoveries offset about 26.5% of gross chargeoffs, or more than twice the figure in the second quarter of 2010.

The pattern was similar at American Express Co., where gross chargeoffs fell 48% from the second quarter of 2010 to $571 million in the third quarter last year, while recoveries edged up by 2% to $144 million.

Overall, Amexas net chargeoff rate fell by 3.8 percentage points to 2.9%. (This rate is the amount of gross quarterly chargeoffs less recoveries at an annual rate, as a percentage of receivables outstanding at the end of the previous quarter. …

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