Why Credit Card Losses Are Poised to Rise

The unusually strong loan performance in the credit card business lasted longer than many observers expected. But today the industry's prolonged post-crisis era finally appears to be over.

During the second quarter the percentage of loans that were at least 30 days late climbed at most of the country's large credit card issuers — including JPMorgan Chase, Citigroup, Capital One Financial, Discover Financial Services and Synchrony Financial — compared with the same three-month period in 2015.

To some extent, the increase in delinquency rates was to be expected. Credit card loans have been growing at a relatively fast clip — total revolving consumer debt is currently about 7% higher than it was in 2014, according to Federal Reserve data — and losses tend to peak when new accounts are around two years old.

Because the industry saw slower growth immediately after the Great Recession, it comes as no surprise that loss rates are currently on the rise.

At the same time, there are also signs that credit standards have loosened at some card issuers.

JPMorgan said during its second-quarter earnings call that 20%-30% of its new credit card customers have FICO scores below 700. The company did not say what that figure was previously, but suggested that the percentage has grown.

"Since the end of 2013, we made some changes to our credit box and our credit risk policies very, very thoughtfully," the firm's chief financial officer, Marianne Lake, told analysts on July 14. "And we've been monitoring them very closely. And what we're seeing in terms of the loss rates and the seasoning of them is fully in line with our expectations."

Discover also acknowledged loosening underwriting standards in its credit card business, though only marginally.

"The average FICO is slightly down over the last few years," Chief Executive David Nelms told analysts on Tuesday. "But generally the quality of the composition of the customers is very consistent with what we've pursued in the past."

Capital One built the provision for losses in its credit card business by 41% during the second quarter, which the company attributed to growth in its loan portfolio.

But CEO Richard Fairbank also stated that competition is increasing in the U.S. credit card market, including in the subprime segment. "Over time, this can have impact on the growth opportunity and even credit quality," he said.

Banks are looking to build their credit card portfolios at a time when low interest rates are hampering other opportunities for growth, said Michael Taiano, an analyst at Fitch Ratings.

"You are starting to see a little bit of loosening of underwriting standards," he said. "And that ultimately is going to lead to higher losses down the road."

For now the card issuers are being aided by favorable economic trends. Initial jobless claims have been below 300,000 for 72 consecutive weeks, which is the longest such streak since 1973, according to the U.S. Labor Department.

"The theory is as long as people are not losing their jobs, they should be able to stay current in their credit card payments," said Christopher Donat, an analyst at Sandler O'Neill.

In addition, a closely watched ratio from the Fed, which tracks financial obligations as a percentage of disposable income, has not been lower since the fourth quarter of 2012. That data suggests that despite the industry's recent growth, credit card debt remains at manageable levels.

"I think the consumer is still generally healthy," Synchrony CFO Brian Doubles told analysts Friday, a little more than a month after the Stamford, Conn.-based firm raised its forecast for credit losses, which sparked a sell-off in the company's shares.

"With that said, the consumer continues to take on more debt. They continue to take on more leverage. And while it appears to be modest and it looks like the overall levels are still pretty reasonable and pretty responsible, it's something we're watching carefully."