Mixed News for Credit Card Issuers

U.S. credit card issuers have reported a drop in the default rate for October, though delinquencies are rising as a result of continuing stress on consumers. While a decrease in the default rate reflects a decline in late payments in the first half of the year, the increase in delinquencies is bad news for the sector as it implies that the companies could experience more charge-offs in the coming quarters.
 
Consumers remain under stress as a result of the weakness in the housing market, combined with job losses. Recently, Fitch has also expressed its concern about the credit card issuers in the U.S. Fitch expects U.S. credit card issuers’ earnings to remain challenged over the near term as a result of soaring unemployment, bankruptcies and losses.
 
The default rate (or charge-off rate) has improved in October from the prior month. For American Express Co. (AXP - Analyst Report) it was down 60 basis points (bps) to 7.8%, while for Bank of America Corp. (BAC - Analyst Report) the rate dropped 103 bps to 13.22% in October. The situation was the same for JPMorgan Chase & Co. (JPM - Analyst Report), Citigroup Inc. (C - Analyst Report) and Capital One Financial Corp. (COF - Analyst Report). JPMorgan’s default rate declined 10 bps to 8.02%, Citigroup’s defaults fell 136 bps to 8.79% and Capital One's charge-off rate decreased 73 bps to 9.04%.
 
However, we are concerned about the rise in delinquencies which increased 34 basis points to 5.72% in October at Capital One, 26 bps to 4.95% at JPMorgan and 6 bps to 7.59% at Bank of America. However, delinquencies remain unchanged at American Express.
 
Credit card defaults and delinquencies are highly correlated with the unemployment rate. Hence, with the jump of U.S. unemployment over 10%, credit card issuers are continuing to face severe losses. The unemployment rate increased 40 bps to touch 10.2% in October. It is also expected that the rate will remain above 10% through 2010. Consequently, consumers are expected to increasingly fall behind on payments and hence, the losses for credit card issuers could worsen further.
 
Additionally, the Credit Card Accountability, Responsibility and Disclosure law signed in May 2009 to protect consumers from sudden rate hikes, hidden fees and other deceptive practices could have a significant negative impact on the credit card issuers' earnings.

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