Reflections on Credit Card Fees and Chargeoffs; Peak Revolving Credit

It's a mixed bag for credit card trends as chargeoffs rise at Capital One and Bank of America, while falling most other places.

Please consider the Wall Street Journal article Credit-Card Trends Mixed.

Capital One Financial Corp. said charge-offs, or credit-card loans on which the lender doesn't expect to collect, increased to an annualized rate of 10.1% in December from 9.6% in November in its U.S. credit-card business. But reversing a streak of increases, borrowers at least a month behind on credit-card payments fell to 5.78% last month from 5.87% in November.

Discover Financial Services said charge-offs in December totaled 8.68% of credit-card loans that have been packaged into bonds, down from 8.98% in November. The 30-day delinquency rate fell to 5.49% from 5.65% in November.

For the quarter ended Dec. 31, the 30-day delinquency rate for AmEx was 3.7%, according to preliminary data, down from 4.1% in the third quarter. In addition, AmEx wrote off 7.1% of its card loans last month, compared with 7.6% in November. For the fourth quarter, the company wrote off 7.5% of its U.S. card loans, according to preliminary data, down from 8.9% in the third-quarter.

Bank of America Corp. reported a write-off rate of 13.5%, up from 13% in November, reversing a three-month trend of declines. The company has had the highest write-off rate among its peers since at least July.

Chase, a unit of J.P. Morgan Chase & Co., said it wrote off 7.1% of credit-card loans last month, down from 8.8% in November. For the fourth quarter, write-offs totaled 9.3% compared with 10.3% in the third-quarter. Chief Financial Officer Mike Cavanagh expects a $1 billion loss for credit cards in the first and second quarters.

Closer Look At JPMorgan

Earlier this evening I received an Email from Keith Hazelton Adjunct Professor of Finance, Oklahoma City University regarding JPMorgan.

Keith writes:

Mish
Here are JPM Chase Surprising Credit Card segment results. Note that JPM Chase's credit card segment results for 2009 show balances, charge volume, number of cards down, charge offs nearly double, but gross fee income and net interest income soar as Chase hammers its customers with fees and higher interest rates.
Regards,
Keith

Fees may be up, but JPMorgan is still losing money and Bank of America is getting clobbered with the highest losses in the industry.

Credit card reform was supposed to stop what is perceived by many to be rate gouging, but issuers simply switched from fixed rates to variable rates and jacked up rates in advance.

Peak Revolving Credit

High interest rates and high fees in conjunction with changing consumer attitudes towards debt and bank attitudes towards lending will have a pronounced effect on revolving credit in the decade to come.

Here is an interesting chart from the article.



Keith writes ... We think revolving consumer credit balances are headed to $300 billion - $500 billion from the nearly $900 billion last month, over the coming decade.

The real story here is not price gouging, but rather a secular peak in revolving credit. The implications on consumer spending and profits at retailers is enormous, yet it is not remotely factored into to equity share prices.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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