Average losses in the first-quarter 2015 for the top six issuers were 213 basis points (bps) below their 2010-2014 averages and now at an unsustainable level over the long term. Analysts are saying the industry may be approaching the inflection point in credit performance.
The average charge-off ratio among the nation’s four largest issuers increased 12 basis points (bps) quarter-to-quarter (QOQ) to 3.09% in the first quarter (Q1/15). The top 100 U.S. banks posted a 10 bps increase QOQ to 3.07%, according to CardData.
All four of the top issuers reported upticks in their charge-off rates QOQ but remain down significantly from Q1/14. Sequentially, Chase was up 15 bps; Bank of America (BofA) up 13 bps; Capital One (COF) up 16 bps; and Citibank (CITI) up 1 bps.
Credit card asset quality will remain strong in 2015, although delinquencies and charge-offs are expected to end the year modestly higher than beginning of year levels, says Fitch Ratings.
Loan growth and moderate loosening of underwriting standards will contribute to a slow reversion nearer to longer-term averages. Fitch sees the expected level of asset quality deterioration to be easily manageable at credit card lenders’ current ratings, reflecting these issuers’ strong capitalization levels.
Net charge-offs improved 25 bps, respectively, year over year, on average, for the top six general purpose card issuers excluding Capital One, whose consolidated metrics include higher loss retail receivables.
Ninety plus-day delinquencies in first-quarter 2015 averaged 0.85% for top issuers on a weighted average basis for the companies that report the statistic. That level is down 9 bps from 0.94% year over year, although the pace of improvement continued to decline. Fitch does not believe any trends point to material deterioration in asset quality over the near term.
Purchase volumes were up 6.6% in first-quarter 2015, on average, for the top seven general purpose card issuers compared with up 6.7% in first-quarter 2014.
Fitch believes that volume growth could have been higher had it not been slowed by lower gas prices year over year, which appears not to have yet translated into increased consumer spending in other categories.
Despite the growth of purchase volumes, consumer leverage, as estimated by the financial obligations ratio (FOR), which measures debt service payments on mortgage debt, auto debt, consumer debt and property taxes as a percentage of disposable personal income, continued to decline, amounting to 15.27% in fourth-quarter 2014. This compares with a peak FOR of 18.09% recorded in fourth-quarter 2007 and a 35-year average of 16.51%. As interest rates rise, and consumers experience higher debt service burdens, Fitch would expect consumer leverage to increase, all else equal.
Fitch believes the U.S. consumer’s propensity to borrow has declined to some extent following the recent financial crisis, as evidenced by trends in the savings rate and personal leverage ratios. In a positive sign for credit card borrower strength, the personal savings rate in the U.S. is trending higher and is 9 bps above the monthly average rate of 5.7% during 2010-2014.
For issuers, the profitability of cards has also remained solid, with the top seven issuers posting an average return on loans of 4.0% in first-quarter 2015. Still, returns were down modestly year over year, driven in part by a decline in reserve releases.
For data, background and forecasts on U.S. Credit Card Performance: Search CardWeb.com’s CardFlash® Library of more than 58,000 archived articles; Access CardWeb.com’s CardData® for current and historical Performance, Portfolios, Profiles, etc. Visit RAM Research® (ramresearch.com) for quarterly and annual forecasts covering more than 150 metrics. [complimentary or deeply discounted access to CardWeb.com subscribers].
Additional database resources include CardWeb.com’s CardExecs® – comings & goings of payments movers & shakers; CardWeb.com’s CardWatch® – ears & eyes on marketing globally (57K items); and CardWeb.com’s CardPixes® – form & function of card design (7K items).