As Card Losses Hit Record Levels, Banks Hit Back
By
Alex Dumortier, CFA
July 2, 2009
|
Credit card losses reached 10.4% in June -- a record level that is quickly eroding bank profits on these products. That's bad news for large card issuers such as Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM).
The trend has prodded the banks into action. Citi responded by increasing the rates it charges on approximately 14 million cards by almost three full percentage points, according to analysis by Credit Suisse. Meanwhile, JPMorgan Chase announced on Tuesday that it is raising its minimum required payment on unpaid balances from 2% to 5%, beginning in August.
What's the damage?
When the government stress-tested 19 major financial institutions, it estimated losses on credit card loans for 2009-2010. The following table contains the estimates for seven major card issuers under the government's "more adverse" economic scenario. The numbers are eye-watering:
|
Bank
|
Estimated 2009-10 Credit Card Losses
|
Total Loss Rate
|
|
Wells Fargo (NYSE: WFC)
|
$6.1 billion
|
26.0%
|
|
Bank of America
|
$19.1 billion
|
23.5%
|
|
Citigroup
|
$19.9 billion
|
23.0%
|
|
JPMorgan Chase
|
$21.2 billion
|
22.4%
|
|
US Bancorp (NYSE: USB)
|
$2.8 billion
|
20.3%
|
|
American Express (NYSE: AXP)
|
$8.5 billion
|
20.2%
|
|
Capital One Financial (NYSE: COF)
|
$3.6 billion
|
18.2%
|
Source: The Supervisory Capital Assessment Program, overview of results, May 9, 2009.
But even those figures don't tell the full story. Under the "more adverse" scenario, average unemployment was considered 8.9% this year and 10.3% in 2010. Unfortunately, the unemployment rate in the first half of the year was already at 8.65%, and it reached 9.5% in June. In that context, I think it's highly likely that reality will turn out to be "even more adverse." Because unemployment is one of the best predictors of credit card losses, we should expect bank losses to exceed initial estimates.
The good news for stock pickers
This suggests that banks could still have some unpleasant surprises in store for us when they announce earnings over the next 18 months. Nevertheless, I continue to think this is one of the most attractive sectors for serious stock pickers. The risk of financial meltdown has receded, but valuations remain depressed due to the uncertainty concerning future profitability, spelling opportunity for investors with cash on hand and a steady temperament.
Looking for specific names? Morgan Housel highlights three high-quality companies that are still cheap.
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