Some consumers feel ripped off at the notion of paying 18% interest rates, or even higher, on their credit cards. The issue isn’t just about being gouged. Consumers tend to have a bad habit of keeping up with their credit card loan balances, having delinquencies in many cases, and then having outright charge-offs in the worst cases. The good news about the bank earnings for the second quarter is that there doesn’t look to be a real risk of a recession in the near term. The bad news is that we are continuing to see credit deterioration trends taking place in credit cards.
If you have tracked what has been going on with car loan performance and some areas in consumer credit, the current deterioration is something that really should not be ignored. If it continues to get much worse, then it is going to alter how banks evaluate credit risk. This continued uptick in weakening credit trends likely will pose increased credit reviews, and possibly higher borrowing costs, for borrowers who have marginal credit scores. It should also act to put more pressure on borrowers with lower credit scores.
24/7 Wall St. tracked credit card reporting metrics at the top four banks that reported earnings in the week of July 14. Not all the metrics were bad, but there were some standout issues as a theme in credit card losses. Note that credit cards are just one of many facets that drive consumer spending and bank earnings alike.
Citigroup Inc. (NYSE: C) showed that store credit cards managed by the firm likely will have net credit losses of about 4.6%. That is up from a prior 4.35% forecast, but Citi blamed poor collections on delinquencies rather than a decline in credit quality or underwriting standards. To back up the latter, Citi said that the bank is not seeing any deterioration in the rate of accounts becoming delinquent and the bank wasn’t really seeing an impact from co-branded cards of stores closing locations. Citi’s North American credit card balances were $130.8 billion in the second quarter of 2017, up from $126.4 billion in the first quarter of 2017 and from $120.8 billion in the second quarter of 2016.
JPMorgan Chase & Co. (NYSE: JPM) saw a drop in credit card openings in the second quarter at 2.1 million, down 22%. Account openings a year ago were about 2.7 million, just ahead of the Sapphire Reserve. Its net charge-offs rose 21% to $1.04 billion in the second quarter, and the 3.01% net charge-offs rate was also up from 2.7% a year ago. Jamie Dimon and his team put up 19% more in credit card loss allowances ahead to a level of $4.38 billion.
PNC Financial Services Group Inc. (NYSE: PNC) said that its overall credit quality for the second quarter of 2017 remained stable versus its first quarter metrics. While PNC looked better on credit metrics than some of the banks, its provision for credit losses for the second quarter of 2017 increased by $10 million from the first quarter. PNC’s provision for credit losses of $98 million was up from $88 million in the first quarter, but it is still down handily from the $127 million provision for credit losses in the June quarter of 2016.
Wells Fargo & Co. (NYSE: WFC) said that consumer losses were driven by lower losses across all asset classes, with the exception of credit card. On Wells Fargo’s net loan charge-offs in credit cards, the rate was $320 million, or 3.67% — up from $309 million and 3.54% in the first quarter and versus $275 million (3.09%) in the fourth quarter of 2016.
While these numbers are worse than before, the reality is that they are still quite a ways out from being a major concern that might pose big risks for the banks. It is also good to note that many other areas in consumer and business remain much better off.
Consumers and investors alike should watch the major credit card reports from the likes of American Express, Capital One and Bank of America in the days ahead to get a clearer picture of what the real credit card landscape looks like as a whole.