Credit card charge-offs remain stubbornly high, with
some credit card issuers accelerating defaults to clear their
delinquency pipelines. Results from the half-year reporting season
suggest that credit losses peaked in the first quarter and will
trend lower in the second half of 2010. Charles Davis


Credit card loss rates are on the
decline for the first time since 2008, a trend which looks set to
accelerate over the latter half of the year. Analysts at Moody’s
Investors service expect loss rates in the autumn to have declined
between 10 and 33% year-on-year.

The American Bankers Association
reported that past-due credit card payments (defined as accounts
that are late 30 days or more) fell to 3.88% in the first quarter,
from 4.39%.

In the recent second-half reporting
season, Bank of America’s (BofA) 135 basis-point drop was the
largest among its peers, while Citigroup reported only a slight
increase in charge-offs.

Quarterly data compiled by the
Federal Reserve found that credit card delinquencies fell to 5.80%
in the first quarter, from 6.43% in the fourth quarter of 2009.

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Consumers make an

ABA Chief Economist James Chessen said the improvements reflect
concerted efforts by consumers to shore up their finances.

“It’s clear that consumer balance
sheets are improving. People are borrowing less, saving more and
building wealth. These are all positive signs,” he said.

Chessen added that across-the-board
improvements in housing-related loan delinquencies indicate
stability is returning to the housing market.

“This is the first inkling that
stability is taking hold in the housing market, but the pace of
recovery will still be long and drawn out,” he said.

More encouragingly, the trend in
card markets carried over into the broader consumer loan market, as
overall delinquencies fell for the third consecutive quarter.
Delinquency rates on home equity loans fell to 4.12%, from 4.32% in
the fourth quarter of 2009, and the Fed expects similarly positive
results for the first quarter numbers for 2010.

Home equity loan delinquencies fell
for the first time in two years, to 4.12% of all accounts from
4.32% in the previous quarter. Home equity lines of credit
delinquencies fell nearly a quarter% to 1.81% of all accounts from
2.04% in the previous quarter. Property improvement loan
delinquencies fell to 1.40% of all accounts from 1.63% in the
previous quarter.

“The overall risk in banks’
consumer loan portfolios is improving and will continue to do so,”
Chessen said. “Banks are putting losses behind them and following a
prudent approach to new loans because the on-again, off-again
economy is keeping risk high. Regulators are also demanding that
banks remain cautious. With job growth creeping back slowly and
personal incomes rising a bit, I’m hopeful that improvements in
consumer delinquencies will continue.”


Improved portfolio

The improved credit picture is translating into stronger
portfolio performance among the nation’s largest issuers. Bank of
America reported sharp declines in credit card losses and a
significant improvement in charge-off rates.

After jumping at the beginning of
the year, charge-offs have generally been on the decline in recent
months as consumers continue to pay down debt and banks tighten
their underwriting standards.

The annual net charge-off rate at
BofA dropped to 11.98% in June, its lowest level since April 2009.
Charge-offs at BofA had been trending lower since peaking at 14.54%
last August, but increased during the previous two months.

The rate of total delinquencies on
loans in its credit card portfolio fell 23 basis points, to 6.16%.
In a sign of just how sluggish the improving economy remains, the
rate of early-stage delinquencies, or loans 30 to 59 days past due,
inched up 2 basis points, to 1.46% of total loans.

The annual charge-off rate at
JPMorgan Chase & Co fell 57 basis points, to 8.38% in June. The
rate of loans 30 days or more past due slipped 9 basis points, to

American Express said its annual
net charge-off rate fell 60 basis points, to 5.7%, the lowest since
the third quarter of 2008. Its charge-off rate has fallen in 12 of
the past 14 months. Its delinquency rate dipped 20 basis points, to

The rate of credit card losses at
Discover Financial Services fell 82 basis points, to 8%, and the
delinquency rate fell to 4.81%, its lowest since November 2008. And
at Capital One, the charge-off rate dipped 20 basis points, to

For most of 2010, the number of
accountholders who are late by more than one month but less than
two has been shrinking faster than would be indicated by typical
seasonal patterns, continuing an apparent turn in the credit cycle
that began last year.

In a June report, Matias Langer, an
analyst at Moody’s Investors Service, wrote that estimates of
future charge-offs based on such early-stage delinquencies, and the
proportions in which they have translated into balances that are
deemed uncollectible and written off five months later (about 57%
on average from September through March), indicate that charge-offs
peaked in the first quarter.



Not everyone sees blue skies ahead for the cards market. In a
recent report, Joseph Astorina, an analyst at Barclays Capital,
attributed “stubbornly high” charge-off rates to some issuers
“accelerating defaults to clean up the delinquency pipeline.”
Astorina projected that charge-offs will “trend lower through
summer and into early fall.”

Perhaps the most delicate balance
for US issuers lies in tightening credit standards even as the
economy cries out for greater access to lending.

Revolving credit in the US – 98% of
which is credit card debt – in May fell 0.9%, to $830.8bn from a
revised total of $838.2bn in April, according to a Federal Reserve
report on consumer credit released in July.

The decline marks a record 20th consecutive month of shrinking
US consumer credit. Consumers have eliminated nearly $127.3bn in
credit card debt since the end of 2008, when total consumer
revolving credit reached $958.1bn.