personal finance

US banks tap the brakes on consumer credit


This is a good time to offer Americans credit. Economic growth is solid, unemployment is low, and wallets are open.

In July, retail sales grew at a sturdy 6 per cent from the year before, faster than analysts had expected. The prosperity extends even to dowdy brick-and-mortar stores: Macy’s, the struggling department store chain, last week posted its third straight quarter of sales growth after several years of declines. Walmart, the vast discount retailer, reported its best quarterly sales growth in 10 years. At the other end of the price spectrum, Nordstrom, the upscale department store chain, reported a big jump in sales which drove its stock up 13 per cent.

Nor does the spending seem to be especially reckless. When, at the beginning of last year, household debt surpassed its last peak, in 2008, many pundits speculated about the possibility of a new financial crisis. But US household debt — all $13.3tn of it, according to the New York Fed — is much lower, relative to both GDP and disposable income, than it was in the run-up to 2008.

The big card-issuing banks are pleased. In second-quarter calls with analysts, JPMorgan highlighted that consumer purchases using their cards were up 11 per cent; Bank of America’s purchase growth was almost as high. Citigroup and Capital One pointed out loan balances were growing nicely.

If the card business is picnic, though, it is a late summer picnic; the watermelon has already been served, and the skies are showing the early signs of darkening. The card issuers acknowledge that, as US consumers have gotten their mojo back, the competition for their business has become very competitive indeed. Savvy Millennials shuffle between cards to maximise rewards and introductory interest rates. Big spenders with good credit ratings are the prize in a “ rewards war”.

At the same time, the current economic expansion, at the grand old age of nine years, is the second longest on record. That does not provide any particular reason to think it is near and end. But trees do not grow to the sky.

$8bn

Quarterly bad credit card debt write-off in 2018

The competitive heat and the length of the cycle are making themselves felt in industry-wide data. Measure of credit quality, while not flashing amber, are unmistakably headed in the wrong direction.

Quarterly write-offs of bad credit card debt at US banks peaked at nearly $19bn in the first quarter of 2010 and bottomed under $5bn in 2015, according the FDIC. Since then they have crept back over $8bn.

The rate at which credit card holders are falling delinquent, while still at a low level, has also been creeping up since 2015. Bankers dismiss these trends as the natural “seasoning” of credit card loan portfolios that have been rebuilt since the recovery. But the numbers show that it is growing harder to sell cards to high-quality customers.

Last month, the Federal Reserve’s Board of Governors released its annual report of credit card banks’ profitability. It showed return on assets falling in 2017, for the fourth year in a row. At 3.4 per cent, it is a full third lower than it was in 2013. The Fed noted that a moderate increase in provisions for losses cut into profits. More important, non-interest revenues — which are made up both of payments from merchants and the annual fees and penalty fees charged to card holders — are declining.

Part of this is down to big merchants driving harder bargains with the banks and pushing down on fees. Costco, the big discount retailer, moved its branded cards from American Express to Citi last year, for example.

“The banks are giving more to the merchants,” said Jason Goldberg, an analyst at Barclays.

Another contributor to the squeeze in fee revenue is generous rewards offers for new customers, which are booked against revenue when the customer signs on.

Finally, the compression of non-interest revenue is a long-term effect of the Credit Card Accountability Responsibility and Disclosure (CARD) act of 2009, a law that prohibited many punitive fees and limited the ability to raise customers’ rates.

“Issuers lost their ability to dynamically re-price and their ability to generate fee income,” said Brian Riley of Mercator Advisory Group.

Fee and margin compression is even visible in the accounts of big banks with stout card portfolios: At JPMorgan Chase’s card business, for example, non-interest revenue fell by $1.8bn, to $4bn, between 2013 and 2017, even as the card loan portfolio grew. At the same time, Chase’s “net revenue rate” — all fee and interest income as a proportion of card loans — has been tightening. A similar pattern of flat or declining fees and compressing margins is visible at Citi and Bank of America.

As margins compress and credit metrics soften, it becomes harder for banks to keep the pledges — made frequently in the wake of the financial crisis — to run disciplined businesses, even if that means accepting slower growth. If the industry starts chasing profit at the lower end of the credit spectrum, another crunch would become a matter of time.

There are some signs that the banks are pulling back: growth in the number of open card accounts has slowed to the low single digits in the last few quarters, according to the Federal Reserve. The Fed’s loan officer survey also shows more large banks tightening standards for card applications than loosening them.

If the long cycle should finally start to turn, though, the pressure on bankers to generate profits will grow greater still. Whether they will maintain their discipline even then will determine the outlook for the industry for years to come.



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