Credit-Card Defaults May Rise As Tax Refunds Wane, Analyst Says
July 17th, 2009
Bank of America Corp., American Express Co. and JPMorgan Chase & Co. may face further credit- card defaults as benefits from income-tax refunds wane and unemployment rises, analysts said. JPMorgan lost $433 million on soured card loans in the second quarter and charge-offs may reach 10 percent in this quarter and be “highly dependent” on the pace of unemployment later this year, the New York-based bank said today.
U.S. card issuers yesterday reported a drop in delinquencies on loans as much as 180 days overdue — a signal for future write-offs. Analysts are concerned that “early stage” delinquencies, loans that are overdue 30 days to 59 days, climbed at JPMorgan, Discover Financial Services and Capital One Financial Corp.
“We remain bearish on U.S. card-issuing businesses, as it is difficult for us to ignore the weak macro environment, unemployment growth, consumer-bankruptcy growth, credit contraction, and the mature U.S. credit card market,” John T. Williams, an analyst with Macquarie Capital USA Inc., said today in a research note.
Bank of America, the biggest U.S. bank by assets, said June charge-offs were 13.86 percent and delinquencies were 1.88 percent, exceeding the totals for Citigroup Inc., JPMorgan, American Express, Capital One and Discover. Credit-card losses for U.S. issuers could total $82.4 billion, almost a quarter of all loans, if charge-offs reach 18 percent to 20 percent, the Federal Reserve said May 7 after stress tests on 19 lenders, including Bank of America.
Best Performer
American Express, the best performer this year in the Dow Jones Industrial Average, said yesterday write-offs for the second half may decline from its previous forecast. AmEx, which reports results July 23, rose $1.12, or 4.1 percent, to $28.34, at 3:55 p.m. in New York Stock Exchange composite trading. The shares advanced 47 percent through yesterday, compared with a 1.8 percent drop for the index of 30 industrial companies.
Richard Shane, a Jefferies & Co. analyst, raised AmEx to “buy” from “underperform” and increased his 12-month target to $33 from $18, saying he expects credit-card losses to top out in the fourth quarter. “We believe this will become increasingly clear over the next several months, driving consensus estimates higher,” Shane said in a research note.
Analysts are wary about predicting a peak, saying recent declines in charge-offs and delinquencies may be a seasonal phenomenon influenced by a rise in U.S. income-tax refunds and federal stimulus money, and consumers being more cautious. “It’s going to be very highly correlated with what the economy does, what the unemployment rate is, and that we really don’t know,” said Kathleen Shanley, an analyst at corporate bond research firm Gimme Credit.
Charge-Offs Triple
Charge-offs at U.S. credit-card lenders have almost tripled since January 2007 as U.S. unemployment climbed to 9.5 percent in June, the most since 1983. President Barack Obama said July 14 he expects the unemployment rate will “tick up” in the next several months and that it’s “not yet clear” how quickly the job market will rebound as the economy recovers.
Capital One surged almost 12 percent yesterday, the biggest one-day gain in more than two months, as investors probably focused on a drop in overdue loans, rather than a rise in early stage delinquencies, JPMorgan analyst Andrew Wessel said. “This is a seasonal trend that has likely been exacerbated by the addition of government stimulus checks sent out in May,” Wessel said in a research note. “Early stage delinquencies have also followed the seasonal trend of ticking up in June following several months of declines during tax-return season.”
Loans 30 days to 59 days past due at Capital One rose to 1.28 percent in June from 1.19 percent in May, snapping a four- month decline. Defaults, which rose to 9.73 percent in June from 9.41 percent in the prior month, may peak about 11 percent in the first quarter next year, Wessel said.