U.S. credit-card issuers say the days when write-offs and the jobless rate moved in lockstep are over.
After record defaults for the industry in 2009, issuers ranging from JPMorgan Chase & Co. to Capital One Financial Corp. are writing off fewer card loans even as unemployment remains near 10 percent. Write-offs as measured by Moody’s Investors Service fell to 8.79 percent in October, the lowest since January 2009, while JPMorgan, the nation’s No. 1 issuer, reported its biggest quarterly profit from cards in three years.
Card losses have decoupled from the jobless rate because people who are out of work for an extended period and default on loans can’t do any more damage, bankers say. Issuers typically write off soured card loans after 180 days, and those customers usually don’t get access to new credit.
“You can only charge off once,” said Capital One Chief Executive Officer Richard D. Fairbank during a Nov. 17 investor presentation by the McLean, Virginia-based company. “Someone who’s been unemployed for three years, I can pretty much guarantee that long ago they said goodbye to their Capital One credit card.”
Credit performance has closely tracked unemployment for 20 years, Fairbank said, and the pattern persisted through last year. Card write-offs, as measured by Moody’s, eclipsed a record 10 percent in May 2009. That same month the jobless rate surpassed 9 percent for the first time since 1983.
Write-offs now have dropped below the unemployment rate, which climbed to 9.8 percent in November, Labor Department figures showed today in Washington. Payrolls increased for a fifth straight month, by 39,000 jobs, according to the report.
JPMorgan said its card unit earned $735 million in the third quarter, compared with a $700 million loss a year earlier at the New York-based lender. American Express Co., the biggest issuer by purchases, reported U.S. card income was $595 million, the most since the first quarter of 2007, and said in October that fourth-quarter write-offs could be lower than in the third.
“What really matters is a lot of people losing their jobs,” said Roger Hochschild, chief operating officer at Discover Financial Services, during a Nov. 15 interview in New York. “If someone stays unemployed, if they’ve already charged- off, they can’t hurt us anymore.”
Write-offs at Riverwoods, Illinois-based Discover fell to 6.83 percent in October, the second-lowest among the six biggest card issuers after New York-based AmEx’s 4.7 percent.
The “Big Six,” including New York-based Citigroup Inc. and Bank of America Corp., based in Charlotte, North Carolina, reported that overdue loans, a signal of future write-offs, fell in October to the lowest in at least 22 months.
The drop provides “a clear indication that charge-offs have plenty of momentum for further declines at least into the spring of 2011,” said Jeffrey Hibbs, a Moody’s analyst, in a report last week.
That trend, combined with more consumer spending and a continued shift from cash and checks to plastic, may mean higher profit ahead for card issuers after closing accounts, slashing credit lines and reducing promotional rates on balance transfers during the financial crisis.
Visa Inc., the world’s biggest electronic payments network, said this week that U.S. credit-card spending climbed 9 percent in the first four weeks of November. Quarterly U.S. credit spending at San Francisco-based Visa hasn’t grown at that pace since 2007. No. 2 MasterCard Inc., based in Purchase, New York, said spending by cardholders traveling abroad surged an annualized 19 percent from Oct. 1 through Nov. 28.
“We have continued to see people who have a pent-up demand,” said Keith Jelinek, a director in the retail practice at consultant AlixPartners LLP, based in Southfield, Michigan. “People are more optimistic because they feel things can’t get worse and believe there is a light at the end of the tunnel.”
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