Data Causing Concern for Credit Card Market

As if the banking and credit sectors hadn’t taken their fare share of licks this year, this week’s data has highlighted that no one had, or currently has, a complete grasp of the extent to which the economic crisis has hurt credit performance.

It was only a year ago that the Q2 to Q3 surge in the residential mortgage default rate from 0.18% to 0.26% -- the highest level since Q4 of 2003 -- proved that the housing market was indeed heading into a prolonged turndown. But the third quarter of 2008 witnessed the residential mortgage default rate increase 457.7% year-over-year to 1.45% of all outstanding mortgages for all banks, the highest number ever recorded since tracking first began in the first quarter of 1991.

But as the housing market’s troubles persist, credit issuers now have to deal with the very real possibility that the credit crisis may push down credit card loan performance back to levels last seen in late 2005. Much has been written recently on the prospect of credit cards becoming the next economic bogeyman (“Credit Card Charge-Offs Could be the Economy’s Next Big Drag,” Oct. 6).

Continued evidence to support these concerns appeared this week as American Express announced that they recorded their highest monthly increase in credit card delinquencies as late payments rose 35 basis points to 4.4% in October. Their charge-off rate rose to 6.96%, the highest rate since the fourth quarter of 2005.

Further evidence was provided by the Kenneth Lewis, Chief Executive Officer of Bank of America Corp., the largest US credit card issuer. Speaking in Detroit, Mr. Lewis was quoted as saying that “We, as an industry, may end up with possibly the highest credit card losses the industry has ever experienced.”

Bank of America’s charge-off rate for managed net losses rose to 6.40%, well below their Q4 2005 rate of 9.49%. Citigroup, also among the largest US credit card issuers, reported that credit card charge-offs rose from 6.18% in the second quarter to 7.02% in the third, a 40% increase from the third quarter the year prior. As a follow up, Citi announced this week they would reduce staffing by 52,000 employees representing 20% of their workforce, and emblematic of both the financial crisis as well as the prospect of prolonged labor market weakness.

Punctuating the point was the Federal Reserve this week releasing its quarterly report on bank charge-offs and delinquencies. According to the Fed, the seasonally adjusted charge-off rate for all credit card issuers was 5.62% in the third quarter, up from 5.47% in the second quarter and increasing from 4.05% in the same period a year prior.

The credit card market is the most influential sector of the accounts receivable management industry. A long and painful increase in the unemployment rate will continue to drag card portfolio performance down at least through the end of next year. This means much more work for collection agencies that specialize in credit card recoveries, but less credit being extended to consumers which could hamper an economic recovery.

Dimitri Michaud analyzes trends in strategic receivables management within the consumer finance sector, including the banking, credit card and mortgage markets. He conducts research, writes publications and hosts a regular blog on insideARM.com for Kaulkin Ginsberg.

Kaulkin Ginsberg is the parent company of insideARM.com.