Credit Card Losses Mount for Major Banks
Too big to fail? How about too small to pay the bills?
American Banking News:
The lackluster performance of credit card portfolios at major banks indicate that consumers are still stressed by high rates of unemployment. Delinquency rates have slowed down for most issuers in the most recent set of data, indicating that losses will peak sometime during the first half of this year. However, credit card losses will likely remain high for the rest of the year according to the newly released data.
A recent Wall Street Journal blog indicated that Bank of America had the highest write-off rate during the month of December of the banks that had reported their losses, coming in at 13.53%. That rate reversed a 3 month trend of declining losses. Bank of America is down about 2.7% across all consumer loans, where as Discover is down by 1.7% and Capital One is down about 1.1%
Major credit card issuers will continue to face losses over the next 12 months as the industry copes with changes from the impending Credit CARD Act. Banks will no longer be able to charge certain fees and will have much less flexibility in changing consumers’ interest rates as market forces necessitate a change in interest rate. As a result, the banking industry will make changes such as charging more annual fees, but there will be a lag time before the industry fully adjusts.
The changing regulatory environment as well as high unemployment and underemployment rates will be a one-two punch to credit card profits during the next year as well as other forms of consumer credit. Many analysts predict that the unemployment rate will remain above 10% for most if not all of 2010 and it will be some time before credit card businesses consistently make a profit.
As we already discovered last week, credit card losses left JP Morgan looking much less pretty than we're used to seeing, sending a clear signal that the worst is not over. Poor Jamie Dimon, it's rough out there for a pimp ain't it?
The bank's large mortgage and credit card businesses have seen rising credit costs in the last year, offset only by record investment banking revenue.
Losses even on prime mortgages almost tripled to $568 million compared to a year earlier. The bank set aside a total of $4.2 billion to cover mortgage, home-equity and other consumer loan losses in the fourth quarter, up $653 million from the same quarter a year earlier.
To be sure, total credit losses excluding the impact of securitizations actually slipped to $7.8 billion from a high of $8.1 billion in the third quarter.
But much of that decline is due to a reduction in credit card losses related to a May offer allowing card customers to defer payments for a month. That deferral slowed the pace at which customers were delinquent at the end of last year, and pushes some customer defaults into the first quarter of 2010. Total credit losses were up 72 percent from the fourth quarter a year earlier.
"JPMorgan is the bellwether. It is the best, most well-capitalized, best-managed bank," said Jamie Cox, managing partner at Harris Financial Group in Colonial Heights, Virginia. "You would hope they'd be the first bank to be able to begin the process of paring down loan loss reserves."
JPMorgan's credit losses could indicate further trouble for Citigroup Inc (C.N), which reports quarterly results on Tuesday, and Bank of America Corp (BAC.N), which reports on Wednesday. Both banks have large consumer exposure. Bank of America shares fell 3 percent to $16.31, while Citi shares fell 1.4 percent to $3.46.
Christ, Jamie Cox, make sure you get your tongue all up in JPM's smooth taint while you're down there fawning over how well-capitalized they are.
Goes to show you that government intervention will only get you so far and certainly won't do anything about paying off that big screen TV.