Are US credit card issuers over the
worst in terms of results? Although the outlook appears to be
improving, some issuers have been more successful than others in
trimming costs and reining back losses, but it is high unemployment
levels that will ultimately affect charge-off levels, as
Charles Davis


The credit crunch is clearly being
felt among US issuers, as a glance at fourth-quarter earnings shows
that even as loan losses declined from the previous quarter or
stabilised at the top five issuers, issuers’ hesitance to spend or
borrow hampered the companies’ revenues as credit quality remains a
volatile question mark hanging over the industry.

There were bright spots, to be sure,
highlighted by American Express’ (Amex) return to robust
profitability and Capital One’s brighter earnings report, but the
overall picture is mixed at best. Still, fourth-quarter results
from the largest US issuers hint at a recovery underway, even as
the newly enacted credit card reforms kick in, ushering in a wave
of uncertainty.

By far the best news came from Amex, which saw
fourth-quarter profit more than double amid a surge in customer
spending and lower expenses for future defaults. Income climbed to
$710 million, or $0.59 a share, from $306 million, or $0.26 a
share, in the same period in 2008, as the company’s aggressive
cost-cutting paid real dividends.

Earnings for the quarter were buoyed by a
decline in US write-offs from the third quarter, and Amex said its
provision for future loan losses plunged 47 percent to $748

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“We still face the challenge of high
unemployment levels, depressed real estate values, and shrunken
household balance sheets, but the overall economy and our company
are in stronger shape than they were a year ago,” Amex CEO Kenneth
Chenault said in a statement. “While the economic recovery now
under way is likely to be modest, we expect it to continue and have
begun to shift our focus to growing American Express for the longer

Card spending on the rise

Total card spending rose 7.5 percent
to $172.6 billion. Individuals spent an average of $3,209, an
increase of 15 percent from a year earlier when Amex had more cards
outstanding. Total cards fell 5 percent to 87.9 million, as the
issuer continued to rein in issuance. US card income soared to $365
million from $64 million, the company reported. International card
income more than doubled to $73 million, from $36 million.

Capital One also reported a fourth-quarter
profit as the credit-card business made money and the bank
decreased reserves for bad loans.

Net income was $376 million, or $0.83 a share,
compared with a loss of $1.45 billion in the year-earlier period,
the Virginia-based company reported.

Capital One, which repaid $3.56 billion in
government aid in June 2009, is seeking ways to offset declines in
loan balances and consumer demand for credit that remains
strikingly low.

“Loans will continue to decline in 2010,
driven largely by a continuing run-off of businesses we exited or
repositioned earlier in the recession,” Capital One CEO Richard
Fairbank said in a conference call with analysts and reporters.

“As we near the peak of charge-offs in our
consumer businesses, the combination of declining loan balances and
moderating economic outlook create the potential for significant
allowance releases.”

Domestic credit-card charge-offs probably will
peak in the first quarter, Fairbank said, and added that the rate
may reach 11 percent before peaking. Net charge-offs in the
credit-card business slipped to 9.58 percent in the fourth quarter,
from 9.59 percent in the third and 6.93 percent in the previous
year’s period.

Capital One loan-loss reserves decreased by
$386 million in the quarter. The bank added to its reserve for bad
loans in the commercial banking unit and cut back the cushion in
its credit card and consumer units.

Bad news for Bank of

Bank of America’s Global Cards
Services unit’s news was much more grim. The issuer reported a net
loss of $1 billion for the fourth quarter ended 31 December; the
unit reported a $9 million loss for the same period a year ago. The
credit card unit accounted for some 54 percent of Bank of America’s
total consumer banking-related losses during the fourth

Bank of America has posted four consecutive
quarters of $1 billion-plus losses for its card unit, primarily
because of skyrocketing credit card charge-offs during the
recession. But the good news, such as it is, is that losses
gradually are abating from the $1.87 billion loss the bank posted
for the first quarter of 2009.

Credit card net losses dropped 10.9 percent
during the quarter to $4.9 billion, compared with $5.5 billion the
previous quarter ended 30 September, partially because of
reductions in total outstanding card balances within the issuer’s

Even those issuers whose situation is
improving acknowledged that they are wary of declaring an end to
the harshest cycle in decades, with several issuers forecasting
higher loan losses this quarter and beyond.

Many analysts noted that consumers have turned
to using their debit cards more than their credit cards as they
work to keep debt levels in check. At Bank of America, for example,
debit card purchases were up 8 percent during the quarter from a
year earlier, while credit card purchases were down 3 percent.

The credit card units of JPMorgan Chase and
Citigroup also reported losses for the fourth quarter as credit
costs remained high. JPMorgan Chase set aside $4.24 billion to
cover credit card losses, down slightly from the previous quarter,
but 7 percent higher than in the fourth quarter of 2008.

JPMorgan Chases’s total charge-off rate was
9.33 percent, down from 10.3 percent in the third quarter, though
up from 5.56 a year earlier.

The company said it expects the charge-off
rate to climb back to about 10.5 percent during the first half.
During a conference call with analysts, Michael Cavenagh, Chase
CFO, said Chase expects the charge-off rate for the cards unit to
rise to at least 10.5 percent toward the middle of this year.

It seems that charge-off problems will persist
deeper into 2010 and cannot be solved without a major improvement
in the economy, especially in unemployment.