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The Consumer Financial Protection Bureau faces the task of determining how the 2009 credit card reform law has influenced the cost of credit. Its conclusions will likely offer clues to its future rulemaking and spur further clashes between bankers and consumer advocates.
January 22 -
Consumers remain cautious about overextending themselves and card issuers are still wary of offering credit to those less likely to repay.
December 18
U.S. consumers have yet to regain their appetite for revolving debt, a trend that's leaving credit card issuers hungry for profits.
Executives from American Express (AXP) and Capital One (COF) said this week that consumers remain reluctant to run up card balances. That's led the industry to rely more heavily on swipe fees for revenue and focus their marketing efforts on customers who pay off their balances each month.
"What the growth in loans will be in relation to the business is totally dependent on our customers," American Express Chief Financial Officer Daniel Henry told stock analysts during a quarterly earnings call Wednesday. "They are going to decide what amount of leverage that they want to have."
The following day, Capital One chief executive officer Richard Fairbank told analysts: "We believe that cautious consumer behavior is one of the key drivers of persistently weak consumer demand and the resulting pressure on loan growth."
To be sure, the U.S. credit card business is profitable. AmEx earned $1.3 billion pre-tax from its U.S. credit card business in the first quarter. Capital One earned $1.1 billion pre-tax from its credit card business. But the both firms, and the wider industry, remain dogged by the perception that their earnings would grow if they extended more credit to consumers.
For all of 2012, credit card loan balances on existing portfolios at American Express, Capital One, Citigroup (NYSE:C), Discover Financial (DFS), JPMorgan Chase (JPM), and Bank of America's (BAC) card subsidiary fell by 2.6%, according to Moody's.
In the fourth quarter of last year, average credit card debt among U.S. households was $6,980,
One key factor for card issuers will be the pace of job growth and wage growth at the lower end of the economic spectrum. The U.S. recovery has been uneven, with higher earners faring better. But those wealthier consumers are also more likely to pay off their credit card bill each month.
Given persistently high unemployment and weak income growth, consumers are not in a good position to take on a lot more credit-card debt, argues Odysseas Papadimitriou, chief executive officer at CardHub.
He says that if consumers increase their debt by 20% or more they will reach a point where they are unable to repay that debt.
Other factors besides weak loan demand are likely contributing to the sluggishness in card balances.
Card issuers tightened their standards during the financial crisis, and it remains harder to obtain consumer credit than it was for much of the last decade. That industry-wide tightening of loan standards is reflected in today's historically low delinquency rates.
The 2009 credit card reform law may also be having an impact. That law included new requirements regarding increases in customers' credit lines. As a result, Capital One had to retool its system for approving credit line increases, a process that has held back loan growth, CEO Fairbank said Thursday.
The 2009 law also restricts the ability of issuers to re-price existing card balances. That may have resulted in a constriction of credit to borrowers with lower incomes and lower credit scores, says Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods.
"I think issuers are reluctant to go too far down market because of the inability to retroactively re-price," he says.
Some credit card companies are managing to grow their loan portfolios in spite of the industry-wide trends.
For example, AmEx grew its U.S. portfolio during the first quarter by 4% year-over-year. Discover, which has yet to report its quarterly results, had a 6% year-over-year jump in credit card loans in the fourth quarter.
But the fiercer competition in the industry involves more well-off customers who pay their entire bill each month, generating swipe-fee revenue for the issuer. The result has been an arms race over rewards offers.
At American Express, total card spending increased by 6% year-over-year in the first quarter. Capital One saw a comparable increase, even as its credit card loan portfolio was shrinking.
Another factor that's likely driving higher purchase volumes across the industry is the ongoing shift by consumers away from cash and checks, in favor of plastic.
The card companies say they are content to wait for consumer loan demand to pick up, rather than loosening their standards. "So it will be driven not by us, but by the choice of the customer," Henry said. "And we will rely on the credit capabilities we have to properly monitor that."
But it's unclear when consumers will regain enough confidence to take on substantially more credit-card debt. "Consumers just don't have the appetite to take on a lot of unsecured debt right now," says Scott Valentin, an analyst at FBR Capital Markets.
"I think it'll continue that way until broader economic growth improves," adds David Darst, an analyst at Guggenheim Partners.
