Meredith Whitney’s call on credit-card exposure being the next big impairment factor on financial balance sheets appears to be gaining traction by the day. Certainly, what started as a trickle of disappointing news flow risks becoming a steady stream both in the UK and in the US.
The latest – and to date the most alarming – figures come from Capital One Financial Corp, which on Wednesday reported a much steeper loss on defaults than expected. As Bloomberg reports:
April 22 (Bloomberg) — Capital One Financial Corp., the Mclean, Virginia-based credit-card company, fell 4.1 percent in New York trading after reporting a $111.9 million first-quarter loss on higher reserves for soured loans. The loss was 45 cents a share, compared with net income of $548.5 million, or $1.47 a year earlier, the company said yesterday in a statement.
The bank said its previous estimate of $8.6 billion in failed 2009 loans was too low and declined to update the guidance because of “significant uncertainty.” Capital One boosted reserves for loan losses by $124.1 million as rising unemployment squeezes cardholders’ ability to pay debts. The jobless rate reached 8.5 percent last month, the highest in 25 years, and the U.S. has lost about 5.1 million jobs since the recession began in December 2007.
“We don’t rule out the risk of a dilutive capital raise,” Bill Carcache of Fox-Pitt Kelton Cochran Caronia Waller said today in a research note rating the bank “in-line.” Capital One, whose shares have plunged 68 percent in the past year before today, slipped 61 cents to $14.44 at 9:35 a.m. in New York Stock Exchange composite trading. The bank’s loss from continuing operations was 39 cents a share, missing the 4- cent average loss estimate of 22 analysts surveyed by Bloomberg.
And here’s the outlook from the conference call (H/T Calculated Risk):
Credit Loss outlook
We expect further increases in U.S. card charge off rate through 2009 as the economy continues to weaken. It is likely that will our U.S. card charge off rate will increase at a faster pace than the broader economy as a result of the denominator effect and our implementation of OCC minimum payment requirements … We expect monthly U.S. card charge off rates to cross 10% in the next couple of months.
To summarise, here’s some of the other bad news we’ve heard on this front in April alone.
April 1st, Moody’s:
Uncollectible credit-card debts rose to 8.82 percent in February, the most in the two decades that Moody’s Investors Service Inc. has kept records. The percentage of overdue borrowers hit 6.14 percent, a 17- year high, Moody’s said today in a statement. Moody’s cited higher unemployment and predicted charge-offs will exceed 10 percent by the end of this year. Consumers are already cutting back on spending as job losses and equity market declines sap confidence. February unemployment in the U.S. surged to 8.1 percent, the highest in more than a quarter century, and consumer confidence wallows near a record low in March after three straight months of 650,000 or more job losses. Few of the debt securities issued by credit-card providers have been “watch-listed,” by Moody’s, the ratings firm said, because of the explicit support for asset-backed securities transactions by issuers such as HSBC Holdings Plc, Bank of America Corp, General Electric Co and Citigroup Inc.
April 2nd, Fitch:
Fitch Ratings says today that delinquency levels reported on UK credit card trusts increased further in February 2009, reaching a new historically high level after showing a month-on-month increase for each of the last six months. Fitch expects this deterioration to continue throughout 2009, with the rise in delinquencies supporting the agency’s view that the UK economic downturn will continue to impact customers’ ability to service their credit card debts.
In line with the rise in delinquencies, the Fitch Charge-off Index (Fitch CI) recorded a month-on-month increase of 60bp in February to 7.4% from 6.8%. The rise in the Fitch CI was partially driven by a 140bp increase in charge-offs for the Sherwood trust, driven by the impact of day count in February and an increase in the roll through of delinquencies to charge-offs.
April 3rd, Fitch:
US Credit Card ABS Absorbing Record Card Charge-Offs
While credit-card delinquencies and charge-offs breached record levels last month as credit quality deteriorated amid the worsening economy, Fitch said actions by credit-card issuers helped cushion investors against future losses. Despite the poor results, reported in Fitch’s latest Credit Car Index results, portfolio yields increased and excess spread levels remained robust, the ratings agency reported Friday. As expected, charge-offs rose sharply following steep increases in delinquencies in the prior two periods. Fitch expects charge-offs to trend higher in the coming months and approach 10% by this time next year. In the February collection period, Fitch’s Chargeoff Index rose 1.01 percentage points to a record 8.41%, topping the prior high mark reached in November 2005. Charge-offs, or debt deemed uncollectible by credit card issuers and subsequently written off, have increased 33% in the past six months are up 47% year over year.
April 7th, UK Debt Relief Orders (Telegraph):
Personal insolvencies ‘to rise by 40pc’ as Debt Relief Orders are introduced The number of people declared insolvent looks set to soar by 40pc this year to a record 150,000, an accountancy firm has predicted
April 16th, JP Morgan (Bloomberg) :
The bank set aside $4.2 billion to cover bad loans, bringing the total reserve to $28 billion. Credit cards, a unit Dimon said in February he didn’t expect to be profitable this year, lost $547 million in the quarter. The default rate climbed to 7.72 percent from 5.56 percent in the fourth quarter and 4.37 percent in the previous year’s quarter.
April 17th, Citigroup (Bloomberg):
In Citigroup’s credit-card business, costs to cover bad loans and increase reserves for future losses grew 64 percent from a year earlier to $3.09 billion. The bank offset those costs partly by charging customers more: Interest revenue as a percentage of credit-card loans climbed to 13 percent from 11 percent a year earlier.
April 17th, GE (Bloomberg):
Revenue fell 9 percent to $38.4 billion and GE Capital posted lower profit as the recession hurt the credit card and real estate businesses. Investors pushed GE stock to the lowest since 1991 during the quarter on concern the finance arm would undercut profit at the industrial units, including the largest makers of power-generation equipment and jet engines.
April 20th, Bank of America (Bloomberg):
Charging off bad credit-card loans and increasing reserves for expected defaults cost $8.2 billion, up from $4.3 billion a year earlier. Soured home loans drained $3.4 billion, an increase of 89 percent.
April 21st, Tesco‘s personal finance division:
Although we are seeing modest rises in credit card arrears and bad debts, TPF is well-provisioned.
April 22nd, Wells Fargo (Statement):
Credit Card portfolio:
- $22.8bn credit card outstandings represent less than 3% of total loans
- Outstandings down 3% QoQ due to seasonality and lower consumer spending
- $15.7bn Community Banking portfolio is retail-originated and relationship-based
-10.13% net charge-offs reflect economic environment (vs 8.69% in 4Q08)The industry projected peak charge-off rate in the US is estimated to be some 12 per cent, according to State Street. Not quite there yet, but we’re certainly on our way.
All of which means the industry is desperately trying to tighten credit limits and increase fees and charges to make up for losses both in the UK and in the US. As the FT reported on Tuesday on the UK’s situation:
Credit card companies have been quietly raising the interest rates charged to customers, in spite of the Bank of England base rate dropping to a record low of 0.5 per cent. New research published on Wednesday from Which?, the consumer watchdog, revealed that 28 providers of widely held credit cards have either increased interest rates and charges, reduced the number of days to pay or reduced the number of interest-free days in the past 12 months.
This is something that has enraged UK consumer group ‘Which?’. On Wednesday the body accused lenders of using “tricks” to “squeeze extra cash out of customers”.
In the US, meanwhile, the policy has not gone unnoticed by legislators either. Congress is currently expected to vote sometime next week on legislation that would curb fees and penalties at banks that have benefited from the federal government’s bailout.
If passed, the bill would certainly ease the burden facing indebted US consumers. Investors should be mindful, however, that it would also hurt banks’ ability to compensate for losses in this area.
Related links:
Unsecured, insecurity in the UK – FT Alphaville
Yes Meredith, we know you’re worried about credit cards – FT Alphaville
Your not so flexible friend – FT Alphaville
UK saving again - FT Alphaville