U.S. credit cards could brighten bank results

Mon Jul 9, 2012 5:14am EDT
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By David Henry

NEW YORK (Reuters) - U.S. credit card delinquencies have fallen to their lowest levels in at least two decades, baffling banks that expected consumer credit quality to stop improving this year because of persistently high unemployment.

During the financial crisis, banks turned conservative and slashed credit card lines, closed accounts and wrote off bad loans. Delinquencies promptly fell. Then they kept falling and falling and falling.

Credit cards could be one of the few bright spots in an otherwise rough second quarter for big banks. This Friday JPMorgan Chase & Co (JPM.N: Quote) and Wells Fargo & Co's (WFC.N: Quote) will post their earnings reports, beginning earnings season for banks.

With lower credit card delinquencies, banks can dip into money previously set aside to cover bad loans, helping second quarter profit. In a quarter where banks suffered from low rates and still-tepid loan demand, banks need all the help they can get.

For the six biggest U.S. credit card lenders, including JPMorgan Chase, Bank of America Corp, (BAC.N: Quote) and Citigroup Inc (C.N: Quote) the average delinquency rate is down to 2.35 percent from more than 6 percent in early 2009, according to Barclays Capital.

For a long time, credit card delinquencies correlated roughly with unemployment, which was 8.2 percent in June according to a report on Friday. That relationship has broken down in recent years.

In normal credit cycles, lenders would respond to improving credit performance by courting new customers and making more loans. But banks are reluctant to pursue consumers with weaker credit now. The economy is barely growing, and new rules make it harder to levy fees on delinquent borrowers to make up for the higher risk of losses.

With credit relatively tight, delinquencies keep dropping. Discover Financial Services (DFS.N: Quote), which posted results in June because its fiscal quarter ends in May, said its delinquency rate for credit card accounts dropped to 1.91 percent in the most recent quarter, from 2.22 percent three months earlier and from a high of 5.6 percent in November 2009.   Continued...