The Wall Street Journal-20080114-High-End Cards Fall From Grace- Rising Delinquencies on Charges Lead Banks To Curb Generous Terms as Profits Look Shaky
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High-End Cards Fall From Grace; Rising Delinquencies on Charges Lead Banks To Curb Generous Terms as Profits Look Shaky
The luster on all those silver, gold and platinum credit cards is getting tarnished.
For the past few years, banks that issue credit cards have aggressively wooed affluent customers with lavish perks and fat credit lines. Now, that high-end strategy is coming back to bite the banks: There are growing signs that some of those consumers are having a hard time paying their bills.
It is the latest in a series of woes for U.S. financial institutions, which are struggling to contain a series of credit- related problems after years of strong profits. Banks have lost billions of dollars from soured home loans and mortgage-related investments. And defaults on commercial and industrial loans could rise later this year if the economy weakens further.
Investors and analysts will get an in-depth look at the credit-card problem this week when Citigroup Inc. and J.P. Morgan Chase & Co. -- two of the biggest U.S. issuers of plastic -- report fourth-quarter results. Both are expected to set aside hundreds of millions of dollars to cover mounting losses on credit cards and other consumer loans.
Bank of America Corp., which bought card company MBNA Corp. a few years ago, is scheduled to report results next week.
Bank profits have been pumped up in recent years by historically low levels in credit-card delinquencies and write-offs. Those levels had widely been expected to rise with the economic slowdown. The concerns intensified Thursday, when American Express Co. said it had experienced a sudden and broad-based rise in delinquencies in December.
Although Capital One Financial Corp. had also warned about growing problem loans, the AmEx development was viewed as even worse news for the industry because AmEx is well-regarded widely for its creditworthy customer base and sophisticated risk-management capabilities.
"This isn't an AmEx issue, it's an industry issue. We have started to see a spillover from the mortgage market and the weaker economy into credit cards," said Christopher Brendler, an analyst at Stifel Nicolaus in Baltimore.
A slowdown in overall credit-card growth during the past few years sent banks chasing high-end customers. The upscale cards -- which offer amenities such as concierge services and access to popular events -- pump up profits in good times because they carry higher fees for customers as well as merchants who pay banks a percentage on each transaction.
In recent months, banks have scaled back some of their promotional offers on less-attractive customers. For example, they reined in 0% balance-transfer gimmicks by adding on fees and shortening the time frame associated with them.
At the same time, however, they are flooding the mailboxes of their best clients with offers for higher credit lines and lower interest rates.
They are going after good customers such as Megan Bramlette (who is, coincidentally, a credit-card consultant), who says she received two letters from Bank of America reminding her that she hasn't been using her Chicago Cubs credit card -- and then raised her credit line 20%. "It's an aggressive strategy for a dormant card," said Ms. Bramlette, who works for Auriemma Consulting Group and recently moved to London from New York.
Industry analysts say card issuers are likely to start scaling back these types of offers. Banks have more flexibility to reduce credit lines to troubled credit-card borrowers, and to take other actions, than they do with mortgage customers who are locked into their loans.
Still, the rising delinquencies and charge-offs are likely to crimp bank profits at a time when they are under pressure. Card losses at Bank of America are expected to rise to 6% in 2008 from 4.9% in the third quarter, representing more than $500 million in incremental losses, or 12 cents a share, according to a report issued Friday by Goldman Sachs banking analyst Lori Appelbaum.
The bank reports fourth-quarter results Jan. 22.
For Citigroup, which reports results tomorrow, the card business will take a back seat to mortgage-related write-downs. The bank previously said it was expecting to see write-downs of $8 billion to $11 billion, but analysts now expect that number to be far higher.
Citigroup is seeking additional capital from investors and is likely to soon announce big layoffs.
The credit-card business may attract more attention at J.P. Morgan, which has less exposure to the mortgage-related securities problems than some other firms. Investors will be paying close attention to the firm's investment-banking results. J.P. Morgan reports results on Wednesday.
The banks could find themselves under more pressure in their credit- card businesses later this year, especially if December's unexpected rise in unemployment is the start of a trend. The Labor Department said this month that the December unemployment rate jumped to 5% from 4.7%.
"The higher the unemployment rate goes, the more areas of potential loan losses come to the banks," said John Augustine, chief investment strategist in Fifth Third Bancorp's private bank. He says it could take six months for rising joblessness to sting banks with higher defaults, meaning that the coming earnings announcements likely won't reflect the economy's true condition.
