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Bank of America, AmEx May Suffer on Card Defaults (Update1)
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By Hugh Son
Feb. 19 (Bloomberg) -- Credit-card defaults may rise beyond 10 percent this year, breaking records and wiping out more than half of annual profit for lenders including Bank of America Corp. and JPMorgan Chase & Co., analysts said.
Loan failures are about to surpass a previous high of 7.53 percent as people losing jobs amid the U.S. recession can’t repay debt, according to Fitch Ratings. The defaults may peak at 10 percent to 11 percent of loans by yearend under a stress scenario, Goldman Sachs Group Inc. analyst Brian Foran said yesterday in an e-mail, reducing 2009 earnings for issuers including an almost 40 percent cut for American Express Co.
“The challenge is getting past the intensifying credit problems that will probably stay pretty rotten over the next six months or longer,” said John Williams, an analyst at Macquarie Capital in New York, who rates American Express and Discover Financial Services “underperform.”
Banks that already got cash from the U.S. Treasury after losses tied to mortgage securities may have to add billions to reserves for credit-card defaults, straining capital levels further. They are cutting credit lines, raising interest rates and scaling back on mail solicitations to brace for future losses. Citigroup Inc., Bank of America, JPMorgan, American Express, Capital One Financial Corp. and Discover are the biggest card lenders.
Charge-offs, or loans that banks deem uncollectible, reached 7.5 percent in December, according to Fitch Ratings analyst Cynthia Ullrich. The record of 7.53 percent was in 2005 after a change in bankruptcy law spurred a wave of filings, according to Fitch, which tracks a quarter of the $964 billion in U.S. credit card receivables. Unemployment worsened in January, rising to 7.6 percent, the highest rate since 1992.
‘Awful Year’
“This is going to be an awful year for the credit card industry,” Bank of America Chief Executive Officer Kenneth Lewis told lawmakers this month. “The more optimistic views are unemployment at 8 or 8.5 percent, and that would cause very high loss rates in the credit-card portfolios.”
The rise in losses may outpace unemployment as credit-card debt from the past two years is defaulting more than older vintages, Goldman Sachs’s Foran said in a Jan. 26 note. Assuming a U.S. unemployment rate of 9 percent by yearend, 2009 profit for Bank of America, JPMorgan and Capital One may be cut by more than half, he said. Discover’s earnings may be totally wiped out, while American Express profits may be 38 percent lower. Citigroup posted a net loss in 2008, obviating a percentage comparison.
Need for Rescue
Charge-offs may reach the “mid-teens” in a worst-case scenario, Moody’s Investors Service analysts led by William Black said in a Feb. 4 note. Issuers would have to bolster their securities to prevent them from hitting early payment-triggers and lower-rated securities could be downgraded, Moody’s said.
Sustained defaults at 10 percent could force a major issuer to seek a rescue or sell its credit-card division, said David Robertson, president of the Nilson Report, the Carpinteria, California-based trade newsletter.
“There’s never been a lender of that scale in this predicament,” Robertson said in an interview. “Portfolios that have been required to sell themselves to a lender because they’ve gone underwater have been far smaller.”
Samuel Wang of Citigroup and Joanna Lambert of American Express, both based in New York, declined to comment, as did Betty Riess of Charlotte, North Carolina-based Bank of America, and Leslie Sutton of Riverwoods, Illinois-based Discover. Tatiana Stead of McLean, Virginia-based Capital One didn’t returns calls or an e-mail.
JPMorgan, Citigroup
Paul Hartwick of JPMorgan Chase said in an e-mail that the firm was “concerned” about charge-offs, which may rise from 5.29 percent in the fourth quarter to 8 percent by yearend, excluding the September acquisition of Washington Mutual Inc.’s card unit. Chase has about 168 million cards issued.
Citigroup, the largest credit-card company by managed loans, said profit in its global card unit plunged 96 percent in 2008 to $166 million from $4.67 billion a year earlier. Credit losses in the unit rose 53 percent to $5.92 billion and the company more than doubled loss reserves to $3.55 billion.
Bank of America, the second-largest credit-card lender, said its card services unit’s profit declined 85 percent to $521 million last year from $3.59 billion in 2007. Charge-offs rose to $11.4 billion from $8.2 billion the year earlier as 6.18 percent of accounts failed, from 4.79 percent in 2007.
American Express, whose net income slipped 34 percent to $2.63 billion in 2008, blamed rising defaults on having a bigger percentage of small business customers who failed to make payments, Chief Financial Officer Dan Henry said last month. The company also has more cardholders in California and Florida, states especially hard hit by the housing bust, he said.
Private Label
“We expected to see deterioration in the sector,” Ullrich said. “This is the worst I’ve seen in my career.”
The so-called private-label card industry, whose cards are typically only used at a single retailer, had defaults of 10.51 percent in January, according to Fitch, 44 percent higher than a year earlier. These cardholders often have poorer credit histories and choose to pay off other cards first.
Citigroup announced plans last month to sell its private- label credit-card unit as soon as the market permits, and shunted the unit into a new division with other “non-core” businesses including consumer-finance and life insurance. The bank plans to keep its Citigroup-branded credit-card business, which will be folded into regular banking operations.
Federal Funds
General Electric Co., the largest private-label card issuer, said in September it will keep the business after failing to find a buyer since putting it up for sale in late 2007. The unit has about $30 billion in assets and operates cards for retailers including Wal-Mart Stores Inc. and J.C. Penney Co.
Email | Print | A A A
By Hugh Son
Feb. 19 (Bloomberg) -- Credit-card defaults may rise beyond 10 percent this year, breaking records and wiping out more than half of annual profit for lenders including Bank of America Corp. and JPMorgan Chase & Co., analysts said.
Loan failures are about to surpass a previous high of 7.53 percent as people losing jobs amid the U.S. recession can’t repay debt, according to Fitch Ratings. The defaults may peak at 10 percent to 11 percent of loans by yearend under a stress scenario, Goldman Sachs Group Inc. analyst Brian Foran said yesterday in an e-mail, reducing 2009 earnings for issuers including an almost 40 percent cut for American Express Co.
“The challenge is getting past the intensifying credit problems that will probably stay pretty rotten over the next six months or longer,” said John Williams, an analyst at Macquarie Capital in New York, who rates American Express and Discover Financial Services “underperform.”
Banks that already got cash from the U.S. Treasury after losses tied to mortgage securities may have to add billions to reserves for credit-card defaults, straining capital levels further. They are cutting credit lines, raising interest rates and scaling back on mail solicitations to brace for future losses. Citigroup Inc., Bank of America, JPMorgan, American Express, Capital One Financial Corp. and Discover are the biggest card lenders.
Charge-offs, or loans that banks deem uncollectible, reached 7.5 percent in December, according to Fitch Ratings analyst Cynthia Ullrich. The record of 7.53 percent was in 2005 after a change in bankruptcy law spurred a wave of filings, according to Fitch, which tracks a quarter of the $964 billion in U.S. credit card receivables. Unemployment worsened in January, rising to 7.6 percent, the highest rate since 1992.
‘Awful Year’
“This is going to be an awful year for the credit card industry,” Bank of America Chief Executive Officer Kenneth Lewis told lawmakers this month. “The more optimistic views are unemployment at 8 or 8.5 percent, and that would cause very high loss rates in the credit-card portfolios.”
The rise in losses may outpace unemployment as credit-card debt from the past two years is defaulting more than older vintages, Goldman Sachs’s Foran said in a Jan. 26 note. Assuming a U.S. unemployment rate of 9 percent by yearend, 2009 profit for Bank of America, JPMorgan and Capital One may be cut by more than half, he said. Discover’s earnings may be totally wiped out, while American Express profits may be 38 percent lower. Citigroup posted a net loss in 2008, obviating a percentage comparison.
Need for Rescue
Charge-offs may reach the “mid-teens” in a worst-case scenario, Moody’s Investors Service analysts led by William Black said in a Feb. 4 note. Issuers would have to bolster their securities to prevent them from hitting early payment-triggers and lower-rated securities could be downgraded, Moody’s said.
Sustained defaults at 10 percent could force a major issuer to seek a rescue or sell its credit-card division, said David Robertson, president of the Nilson Report, the Carpinteria, California-based trade newsletter.
“There’s never been a lender of that scale in this predicament,” Robertson said in an interview. “Portfolios that have been required to sell themselves to a lender because they’ve gone underwater have been far smaller.”
Samuel Wang of Citigroup and Joanna Lambert of American Express, both based in New York, declined to comment, as did Betty Riess of Charlotte, North Carolina-based Bank of America, and Leslie Sutton of Riverwoods, Illinois-based Discover. Tatiana Stead of McLean, Virginia-based Capital One didn’t returns calls or an e-mail.
JPMorgan, Citigroup
Paul Hartwick of JPMorgan Chase said in an e-mail that the firm was “concerned” about charge-offs, which may rise from 5.29 percent in the fourth quarter to 8 percent by yearend, excluding the September acquisition of Washington Mutual Inc.’s card unit. Chase has about 168 million cards issued.
Citigroup, the largest credit-card company by managed loans, said profit in its global card unit plunged 96 percent in 2008 to $166 million from $4.67 billion a year earlier. Credit losses in the unit rose 53 percent to $5.92 billion and the company more than doubled loss reserves to $3.55 billion.
Bank of America, the second-largest credit-card lender, said its card services unit’s profit declined 85 percent to $521 million last year from $3.59 billion in 2007. Charge-offs rose to $11.4 billion from $8.2 billion the year earlier as 6.18 percent of accounts failed, from 4.79 percent in 2007.
American Express, whose net income slipped 34 percent to $2.63 billion in 2008, blamed rising defaults on having a bigger percentage of small business customers who failed to make payments, Chief Financial Officer Dan Henry said last month. The company also has more cardholders in California and Florida, states especially hard hit by the housing bust, he said.
Private Label
“We expected to see deterioration in the sector,” Ullrich said. “This is the worst I’ve seen in my career.”
The so-called private-label card industry, whose cards are typically only used at a single retailer, had defaults of 10.51 percent in January, according to Fitch, 44 percent higher than a year earlier. These cardholders often have poorer credit histories and choose to pay off other cards first.
Citigroup announced plans last month to sell its private- label credit-card unit as soon as the market permits, and shunted the unit into a new division with other “non-core” businesses including consumer-finance and life insurance. The bank plans to keep its Citigroup-branded credit-card business, which will be folded into regular banking operations.
Federal Funds
General Electric Co., the largest private-label card issuer, said in September it will keep the business after failing to find a buyer since putting it up for sale in late 2007. The unit has about $30 billion in assets and operates cards for retailers including Wal-Mart Stores Inc. and J.C. Penney Co.
