Credit card business under credit pressure
On Monday American Express announced that its net credit card charge off ratio for February was 8.7% and their delinquency rate was 5.3%. These were significantly higher than expected. The charge off ratio is an annualized number, taking one months performance and projecting that same performance for a 12 month period. The delinquency rate is a point in time assessment of cards more than 30 days past due. For that reason the delinquency rate and trend are generally viewed as the more informative number because it is not a projection and it is not an indicator that can be managed by a firm's policies, aggressive or not, on charge-offs. For the overall U.S. card industry the delinquency ratio in January, the last number available overall, was 5.9%, which is the highest level since 1992. In the near term all signs point to more charge-offs ahead.
While this will put extreme pressure on the earnings of credit card issuers, it is unlikely to be even close to the kind of debacle that the mortgage business has become. For the overall consumer economy, however, it's a big problem. In recent months the consumer asset backed securities market has been nearly dead. With these types of numbers, there little likelihood of card securitization issuance opening up. While card securitizations have thresholds of performance that allow a put back to the issuer if the pool of securitized assets deteriorates to pre-agreed thresholds, that is of little comfort now to investors as the bond ratings of the issuers are in flux, as in in flux with downward pressure. What this means is that in order to expand consumer credit with this most popular vehicle, banks would need to absorb all growth onto their balance sheets at a time when the Fed is "stress testing" those same balance sheets. With that dynamic banks will be, are, working to restrain or even contract their credit card receivables through decreasing lines and raising rates.
The TARP money does not solve this dilemma. Banks, especially credit card issuers, ultimately want to lend money and build their business. No one with a mailbox could think otherwise. At the moment, however, working through this crisis of illiquidity in the credit markets is essential to building the banks ability to lend. If they ignored their inability to distribute originations and loaded up their balance sheet, it would not be long before they needed much more than what is available under TARP. Members of Congress can scream about the banks as much as they want. They should instead take a few minutes to study the issue.
Note: From this perspective the continuing lock-up in the securitization markets is indicative of why Paulsen's first proposal was the best and boldest approach offered to date as its goal was to recreate liquidity in the secondary markets, which is generally necessary for investors to have any appetite for new issuance. With that door long closed, regulation of credit default swap trading, as discussed here last week, is the next opportunity to do something constructive.
While this will put extreme pressure on the earnings of credit card issuers, it is unlikely to be even close to the kind of debacle that the mortgage business has become. For the overall consumer economy, however, it's a big problem. In recent months the consumer asset backed securities market has been nearly dead. With these types of numbers, there little likelihood of card securitization issuance opening up. While card securitizations have thresholds of performance that allow a put back to the issuer if the pool of securitized assets deteriorates to pre-agreed thresholds, that is of little comfort now to investors as the bond ratings of the issuers are in flux, as in in flux with downward pressure. What this means is that in order to expand consumer credit with this most popular vehicle, banks would need to absorb all growth onto their balance sheets at a time when the Fed is "stress testing" those same balance sheets. With that dynamic banks will be, are, working to restrain or even contract their credit card receivables through decreasing lines and raising rates.
The TARP money does not solve this dilemma. Banks, especially credit card issuers, ultimately want to lend money and build their business. No one with a mailbox could think otherwise. At the moment, however, working through this crisis of illiquidity in the credit markets is essential to building the banks ability to lend. If they ignored their inability to distribute originations and loaded up their balance sheet, it would not be long before they needed much more than what is available under TARP. Members of Congress can scream about the banks as much as they want. They should instead take a few minutes to study the issue.
Note: From this perspective the continuing lock-up in the securitization markets is indicative of why Paulsen's first proposal was the best and boldest approach offered to date as its goal was to recreate liquidity in the secondary markets, which is generally necessary for investors to have any appetite for new issuance. With that door long closed, regulation of credit default swap trading, as discussed here last week, is the next opportunity to do something constructive.
posted by John Borden at 10:19 PM
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