Even as Stocks Soar, Credit Card Issuers Post Giant Losses

By Eva Maria Norlyk

Even as stocks in mid-October soared above 10,000 for the first time in a year, the joy was short-lived as earnings reports from credit card issuers sent stocks tumbling back below the magic benchmark.

Credit card companies continued to show huge losses on their credit card portfolios in the third quarter. Bank of America, the nation’s second-largest bank and one of the largest recipients of government bailout funds, was among the hardest hit. BofA reported $9.6 billion in total credit losses in the third quarter, more than double the $4.4 billion a year earlier. Even after profits from other divisions, most notably investment bank Merrill Lynch, Bank of America faced a net loss of about $2 billion after preferred dividends in the third quarter, steeper than what analysts had been expecting.

Citigroup also continued to struggle with giant credit losses. Citi reported $8 billion in total loan losses during the third quarter. That’s down $386 million from the nearly $8.4 billion reported in the second quarter of 2009, but hardly a sign of a recovery in the consumer debt market. Citigroup lost nearly $19 billion in 2008 and, like Bank of America, was brought back from the brink of bankruptcy by a $45 billion government bailout. On the bright side, Citigroup managed to post a small net profit of $101 million for the third quarter despite its continued record credit losses.

JPMorgan Chase & Co., the nation’s largest bank, also reported rising loan losses in its home and credit card loan portfolios, but those losses were more than offset by strong performance in its investment banking division, bringing JPMorgan to $3.59 billion in net earnings during the third quarter.

The huge credit losses are a sobering reminder that an increasing number of customers find it difficult to meet payments on both mortgages and credit card debt. As the credit crisis and recession drones on and unemployment rates keep climbing, credit card and mortgage losses are only likely to continue to climb.

Continuing record credit card charge-offs and delinquencies in September are one warning of more losses to come. Bank of America posted the highest charge-off rate for the month, at 14.25%, down from 14.54% in August. Citigroup had the second highest default rate for September, at 10.15% of credit card loans, and Capital One came in third with September loan write-offs of 9.77%.

A silver lining might be that several credit card issuers saw a slight drop in September credit card charge-offs; Chase reported a drop from 8.73% in August to 8.12%; Discover wrote off 8.69% in credit card loans compared to 9.16% in August, and Amex had charge-offs of 8.4% in September compared to 9% in August.

Delinquency rates, however, continued to climb for the third month in a row. Delinquencies are credit card defaults in the pipeline, so to speak; they are loans between 30 to 60 days past due. The delinquency rate predicts future charge-offs, that is, credit card debt more than 60 days overdue.

Credit card defaults and delinquencies typically mirror unemployment, which climbed to 9.8 percent in September, and is expected to rise above 10 percent in the next few months. As a result, credit card companies expect loan losses in the fourth quarter to continue to be equally challenging, and it remains to be seen when the performance of credit card and mortgage loans may begin to stabilize.

Taken together, the numbers paint a bleak picture. Even as Wall Street tries to shake its financial doldrums, Main Street continues to struggle. As a result, the financial industry, which is where the credit crisis and recession began in the first place, still has to absorb huge losses. The data offers little hope of a smooth economic turnaround any time soon. Moreover, some analysts fear that seasonal trends may only exacerbate economic woes, if financially strapped consumers turn to plastic to bankroll the joys of the holiday season.

Published: October 16, 2009