As homeowners in the US reduce their expenditure further
and unemployment rates continue to rise, there is a worry that the
combined effects of low consumer confidence and tighter lending
regulations will spell disaster for the US economic rebound. John
Hill reports


The total number of US credit card loans is
still shrinking, according to a new report issued by Credit Suisse.
Figures from the Federal Reserve show outstanding credit card loans
totalling $670.1 billion at the end of April 2010, down 1 percent
from March and 10 percent lower than April 2009, while outstanding
credit card loans declined 7 percent during the whole of 2009.

While lenders themselves are still looking to
reduce their exposure to risk in the credit market, government
intervention in the form of The CARD Act will inevitably put
pressure on current loan portfolios. Credit Suisse estimates an
additional total credit loan reduction of around 4 to 5 percent by
the end of 2010.

The report comes just after the Federal
Reserve released its figures, showing that consumer credit card
balances fell 12 percent, continuing a streak that began in October
2008. While credit card debt continues to drop, overall consumer
debt grew 0.5 percent to $2.440 trillion in April. Revolving debt
fell to $838 billion from $846.5 billion in March, the
19th consecutive decline in the category. In September
2008, at its highest levels, U.S. credit card debt stood at $975.7
billion. Since then, it has lost around $137.7 billion from
its value.

According to the Credit Suisse report, written
by Credit Suisse analysts Moshe Orenbuch and Lynne Josefowicz,
available credit lines declined $110 billion in the first three
months of the year, representing a 2.7 percent decline from
December. In 2009, available credit lines reduced by 17 percent,
representing $850 billion in total. Since June 2008, available
credit lines have been reduced by $1.5 trillion. The utilization
rate (loans outstanding divided by total available credit) stood at
18.4 percent at year-end, 80 basis points (bps) lower than December
and 60 bps higher than a year ago.

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By GlobalData

What this continued drop in lending will mean
is not entirely clear, although there is certainly a fear that the
reducing borrowing and therefore spending rates may hamper any
attempt at a rebound for the economy.

According to Credit Suisse there are three
primary factors influencing change in the unsecured consumer credit
market currently. The most significant is the underlying economic
environment, particularly unemployment levels. The second issue is
bankruptcy filings, which clearly is affected by the economic
environment and at certain points in time legislation. Lastly, the
timing of a loan portfolio could impact its quality as loans tend
to reach peak loss rates 24-30 months after issuance.

In terms of these three aspects, loan losses
peaked in the second quarter of 2009 while the economy struggled
and are now slowly dropping off. They still remain relatively
high and are expected to remain so until the end of 2010, at around
9 or 10 percent. As expected, these figures are almost directly in
line with unemployment rates, which were up from 8 percent in
January 2009 to 9.9 percent in January 2010.

Meanwhile bankruptcy filings in the most
recently reported week totaled 30,500 filings, 10 percent higher
than second quarter 2009. The four-week moving average stood at
32,500 filings, up 11 percent from a year ago. Year-to-date,
bankruptcy filings are up 15 percent.

Credit card charge-offs averaged 10 percent in
the first quarter of 2010, a 150 bps increase relative to the
fourth quarter of 2009. In the report Credit Suisse said it
forecasts credit losses to decline moderately in the second quarter
of 2010 and continue to improve, albeit slowly, thereafter. This
forecast is based on the assumption that the economy has been
creating jobs in early 2010, with the risk of higher credit losses
arising should the recent gains in employment reverse.

In the last few months before the CARD Act
came into action in February this year, many issuers raised prices
in an attempt to bolster profit margins. While this maybe an
effective technique in the short term, Credit Suisse believes in
the long term competition between the main issuers will negate any
recent gains.

“Citibank and Capital One experienced the
largest increase in purchase APRs among the major issuers,” the
report said.

“Bank of America actually saw a decrease in
purchase APRs in the first quarter relative to the fourth quarter
of 2010. We expect recent industry repricing initiatives to
moderate in the near-term as most issuers proactively raised
pricing over the last several months ahead of the CARD Act,
effective February 22, 2010. We continue to believe that
competition among issuers will likely erode recent revenue benefits
over time; the requirement to reevaluate pricing increases in the
third phase of the CARD Act could pressure revenue margins faster
than expected.”