The percentage of outstanding balances that credit cardholders pay off each month surged last year — a favorable sign for loan performance that mirrored plummeting chargeoffs but that now stands as an obstacle to portfolio growth.
Payment rates for securitized receivables increased by at least 1.2 percentage points from December 2009 to December 2010 at each of the six largest issuers (see chart below). At JPMorgan Chase & Co. the jump was an industry-leading 3.5 percentage points, to 23.7%, and came on top of a large climb the year before.
In a report in December, Moody's Investors Service said payment rates had reached peak levels last seen during the mortgage refinancing boom in the middle of the last decade, when large numbers of borrowers drew on home equity to pay other debts.
At most of the big card lenders, portfolios ended the year flat to modestly higher compared with the third quarter as a seasonal lift from holiday spending that had been overwhelmed by cyclical forces reasserted itself. But the industry typically experiences a seasonal contraction in lending in the first quarter,
During his company's earnings call in January, Daniel Henry, American Express Co.'s chief financial officer, noted that robust growth in transactions volume has become disconnected from borrowing, reflecting a heightened focus on customers with strong credit profiles and consumer deleveraging.
Over the entire time frame charted here, Amex has posted the sharpest increase in payment rates, to 29.6% in December.
"That has lowered the risk profile of the portfolio, but it also has reduced loan growth and has impacted net interest income," Henry said. He predicted that loan growth would ultimately pick up, but said, "I don't think that it will go back to what it was like in '06 and '07, where loans were growing at the same rate as spending."
JPMorgan Chase projected that its card loans would start to grow in the second half, but nevertheless stuck with its forecast that its core portfolio would stand at about $120 billion at the end of the year, or about a 3% drop from the end of 2010. (The company has been running off much of the portfolio it acquired when it bought the banking operations of Washington Mutual Inc.)
Moody's predicted that payment rates would stabilize and maybe drift lower this year as issuers originate more accounts. Also, delinquencies, which suppress payment rates, have little room to further improve, Moody's said.
Capital One Financial Corp. predicted that its domestic portfolio would bottom out in the first quarter under the weight of seasonal factors, and finish the second quarter larger than at the end of 2010 and continue to grow later in the year.
Still, while the drain from chargeoffs has subsided, and card companies are marketing aggressively, Capital One continued to express reservations about some customer segments that tend to revolve balances, as opposed to those that tend to pay off their bills every month.
Gary Perlin, the company's chief financial officer, said the industry would likely keep holding back from "particularly the pretty heavy-indebted revolvers that kind of showed good performance sort of until they got whacked in the great recession."
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