Tag Archives: charge-off rate

FDIC Credit Card Data: Slight Rise in Loans, Continued Decline in Charge Offs

The latest U.S. bank data published by the FDIC reveals that the protracted decline in credit card outstandings may be coming to an end, charge-off rates are continuing to fall, and credit card line utilization rates are relatively unchanged.

  • Between end-3Q11 and end-3Q12, credit card outstandings rose by 0.2%.  This small increase follows a steady series of y/y declines in the years following the financial crisis.  The largest three issuers (Chase, Bank of America and Citibank), which still account for more than half of outstandings, reported a 7% y/y decline, as charge-offs and portfolio sales continue to outstrip new loan growth.  On the other hand, large regional banks (see note at the bottom of the blog) increased outstandings 6% y/y, led by TD Bank (+22%) and SunTrust (+19%).  Looking into 2013, it is likely that outstandings will grow modestly as regional banks and, to a lesser extent, “monolines” pursue loan growth, and as the top three issuers move towards the end of their portfolio deleveraging.  However, much will depend on the demand for credit.  This demand is significantly influenced by macroeconomic trends and consumer confidence, both of which are fragile at present.

  • Credit cards lines fell 2% in the year to end-3Q12.  The top three issuers reduced card lines by 6% while regional banks increased lines by 8%.  Movements in credit cards lines tend to match outstandings very closely.  In 3Q12, credit card utilization (credit card outstandings as percentage of credit card lines) was 21.5%, and this measure has remained in the 20.5%-22.5% range in recent years.  This consistent credit card utilization ratio implies that if issuers increase credit card lines, outstandings growth will follow.  The following table highlights some regional banks that have grown credit card lines over the past year at double-digit rates:

  • Credit card issuers continue to benefit from reductions in charge-offs, which fell 31% in the year to end-3Q12.  The average charge-off rate fell 174 basis points (bps) y/y and 12 bps on a linked-quarter basis, to 4.04% in 3Q12.  Charge-off rates are now at or below historic averages for many leading issuers, and are not expected to fall much further.  In fact, as issuers look to build outstandings and grow revenues in 2013, there may be some upward pressure on charge-off rates, depending on how aggressively issuers open the lending spigot.

(Note: Regional bank category includes the following banks: Bank of the West, BB&T, BBVA Compass, BMO Harris , Fifth Third, PNC, RBS Citizens, Regions, SunTrust, TD Bank, U.S. Bank, and Wells Fargo.)

Credit Metrics for U.S. Card Issuers Continue to Improve

A study of recently-published financials for the leading U.S. credit card issuers reveals that their charge-off rates continue to decline, and that this trend looks set to continue in the coming quarters.

The following table summarizes 1Q12 managed credit card charge-off rates for 11 of the leading U.S. card issuers.  Ten of the eleven issuers reported year-on-year charge-off rate declines of more than 200 bps. The exception was American Express, which had the lowest rate.  The largest decline came from SunTrust, whose rate fell from 8.68% in 1Q11 to 4.83% in 1Q12. Seven of the eleven reported quarterly declines in their charge-off rates.

Of course, many industry observers are questioning when and at what level charge-off rate declines will bottom out.  Trends in 30+ day delinquency rates typically are a predictor of trends in charge-offs, and it is notable that of the seven issuers who published 30+ day delinquency rate data in the most recent quarter, all reported both year-on-year and quarterly declines.

Therefore, we should expect charge-off rates to continue to decline in the coming quarters. However, some issuers are now at or below historic averages (for example, Discover claimed that its charge-off and delinquency rates are at 25-year lows), so will have less scope for further declines.  In addition, these low charge-off rates may encourage some issuers to loosen underwriting criteria in order to grow loans, which can generate some upward pressure on charge-off rates.  Card portfolio acquisitions and disposals can also have an impact on charge-off rates; Capital One reported in its quarterly financials that it expects the acquisition of the HSBC card portfolio to raise charge-off rates by 75 bps.

Credit quality continues to improve for leading U.S. card issuers

The leading U.S. credit card issuers continue to report strong improvements in their net charge-off rates.

  • Of the 11 issuers analyzed, eight had 3Q11 net charge-off rates below 5%.  Four had rates below 4%, with American Express leading the industry, at 2.6%
  • Over the past 12 months, eight issuers reduced rates by more than three percentage points (300 basis points)
  • Seven issuers reported rate declines of more than 100 bps between 2Q11 and 3Q11

Issuers also reported strong year-on-year improvements in 30+ day delinquency rates, although the quarterly trend indicates that these declines may be bottoming out. 

  • Five of the seven issuers analyzed had 30+ day delinquency rates below 3%
  • Six of the seven issuers reported triple-digit y/y declines in delinquency rates. The largest decline was reported by Bank of America (178 bps), which still has the highest delinquency rate among these seven issuers
  • Between 2Q11 and 3Q11, delinquency rates for two issuers (American Express U.S. Card and U.S. Bank) were unchanged.  Capital One’s 30+ day delinquency rate rose 32 bps in the most recent quarter

The strong declines in charge-off and delinquency rates have enabled issuers to significantly reduce their provisions for credit losses, which have boosted profitability.  However, with delinquency rate declines leveling off, it is expected that reductions in charge-off rates and loss provisions will also abate in the coming quarter.

Therefore, issuers will increasingly look towards revenue growth drivers to maintain and grow profitability.  On the one hand, they will seek to continue to encourage cardholders to increase spending on their cards, which drives up noninterest income.  In addition, with charge-off rates now at relatively low levels, and with revenue growth remaining anemic, credit card issuers may be more inclined in the coming quarters to seek to build card outstandings and drive net interest income, perhaps through a combination of easing underwriting standards, offering strong introductory offers on balance transfers, and even reducing APRs.