U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America's lending portfolio, in another sign that consumers remain under severe stress.
Delinquency rates—an indicator of future credit losses—fell across the industry, but analysts said the decline was due to a seasonal trend, as consumers used tax refunds to pay back debts, and they expect delinquencies to go up again in coming months.
Bank of America—the largest U.S. bank—said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.
In addition, American Express, which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4 percent from 9.90, according to a regulatory filing based on the performance of credit card loans that were securitized.
Credit card losses usually follow the trend of unemployment, which rose in May to a 26-year high of 9.4 percent and is expected to peak near 10 percent by the end of 2009.
If credit card losses across the industry surpass 10 percent this year, as analysts and bank executives expect, loan losses could top $70 billion. (More TARP money?)
Until lenders show stabilization then trend-bucking improvement over a several month period, we remain bearish on credit card lenders—and the U.S. consumer,' said John Williams, an analyst at Macquarie Research.
We continue to believe that macro challenges and credit quality concerns will pressure U.S. card issuers over the next 12 months,' he added. 'We expect further challenges as unemployment ticks up.'
However, some smaller credit card companies such as Capital One and Discover reported defaults rates grew less than expected.
Capital One said its credit card default rate rose to 9.41 percent from 8.56 percent, while Discover said its charge-off rate increased to 8.91 percent from 8.26 percent.
JPMorgan Chase—the second-largest U.S. bank and the biggest issuer of Visa-branded credit cards—said its default rate rose to 8.36 percent in May from 8.07 percent in April, but it still holds the best performance among the largest credit card companies.
Credit card lenders are trying to protect themselves by tightening credit limits, raising standards and closing accounts. They have also been slashing rewards, increasing interest rates and boosting fees to cushion against further losses.
That will be a plus for an economy that lives on credit. Retail sales will increase because gas prices have doubled. The consumer is paying twice as much is gas and has less credit because the banks,that are getting free money from the Fed, are closing accounts and raising interest rates. That means more defaults and a whole lot of pissed off people. Add to that the coming commercial loan meltdown and that is what we are staring at now. That is not what you are hearing in he financial press is it?
Oh say it isn't so that B Of A has its default rate, those loans the company does not expect to be paid back, soar to 12.50 percent in May from 10.47 percent in April. That's 12% Santa Maria!!! The "good news" is Capital One said its credit card default rate rose to "only" 9.41 percent from 8.56 percent, while Discover said its charge-off rate increased to "only" 8.91 percent from 8.26 percent. That was better than expected. YIKES!!!!!
Just after they all said it would triple because the "earnings power" was so strong. It may still triple but it might triple from 1.
The beat goes on ....Mikey
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