Moody's released an industrywide report on credit card quality earlier this week, and there's really only one takeaway from it: There's no recovery in the credit card industry.
First, let's take a step back. Last week, most major card providers released August default rates:
|
Bank |
August Default Rate |
July Default Rate |
|---|---|---|
|
JPMorgan Chase |
8.73% |
7.92% |
|
American Express |
9.0% |
9.2% |
|
Discover Financial |
9.16% |
8.43% |
|
Capital One |
9.32% |
9.83% |
|
Citigroup |
12.14% |
10.03% |
|
Bank of America |
14.54% |
13.81% |
An ugly showing, for the most part. This was to be expected, though. Banks usually charge off debt between 90 and 180 days after it's become delinquent, so current increases in default rates represent borrowers who started falling behind earlier this year, when unemployment was growing at a horrendously fast clip and GDP was falling off a cliff. That lag between the time borrowers start falling behind and the time banks acknowledge losses is the reason default rates can increase after the economy, particularly unemployment, starts to recover. And it's no doubt why shares of these companies have surged even while default rates keep blowing up.
What's troubling about the Moody's report is it shows an increase in early-stage delinquencies, or borrowers who are just now starting to fall behind. For the industry as a whole, borrowers more than 30 days but less than 60 days delinquent increased from 1.41% to 1.65%.
What this means is that the deterioration in banks' default rates will undoubtedly continue for many, many more months. As long as early-stage delinquencies are rising, the default rates won’t recover, and banks will have to cover ever-widening holes in their balance sheets.
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