US banks are finally seeing a recovery in credit card borrowing
NEW YORK – Big U.S. banks, including JPMorgan Chase & Co. and Citigroup, appear poised to boost profits on a recovery in the struggling credit card industry, but a possible recession will set back consumers and lead to losses on outstanding loans.
JPMorgan Chairman and CEO Jamie Dimon recently warned of growing recession risks and prepared investors for a likely “hurricane”.
In times of economic stability, cards are one of the most profitable businesses for banks, and analysts say a continued recovery in card borrowing would bring relief to banks.
When consumer spending slumped during the pandemic, Citigroup hit a low point as 2020 ended with US Citi-branded cards’ quarterly revenue down 13% from a year earlier.
Now, overall balances on credit cards and similar loans at U.S. banks are up 15%, as of May 25, from a year earlier, and are back near pre-pandemic levels, according to data. Federal Reserve data. Even better for banks, cardholders are now allowing more of those balances to roll over and incur interest charges instead of paying them off monthly.
Although the size of revolving balances is rarely disclosed by banks, it is critical because interest from revolving accounts generates far more revenue than merchant transaction fees, some of which are shared with card networks, such as Visa and MasterCard.
“The most profitable part of the credit card business is consumers’ revolving balances and then paying them off over time,” said Barclays analyst Jason Goldberg.
At JPMorgan, revolving balances are up 8% from the low, Marianne Lake, co-head of its consumer bank Chase, said at an investor conference in May.
During the pandemic shutdowns, consumers have reduced their credit card spending and paid down their balances like never before, thanks to stimulus payments and cash from refinancing mortgages.
The share of active card accounts with revolving balances has increased over the past two quarters to 52.6% after plunging to 51.3% during the pandemic. These balances generally prevailed at around 60% for the seven years before COVID-19, after reaching 70% during the 2008 financial crisis, according to data from the American Bankers Association.
Banks say cardholders are paying off their debts a little slower now, leading to higher interest-bearing balances. Discover Financial Services, for example, said payment rates were still significantly higher than before the pandemic, but had stabilized and even declined slightly in the first quarter.
As lockdowns lifted, banks last year stepped up card marketing and eased credit standards they had tightened earlier in the pandemic.
Credit cards issued quarterly jumped 39% in the fourth quarter of 2021 from a year earlier to 21.5 million, the highest on record and 14% more than before the pandemic, according to the agency. TransUnion credit rating.
Chase, the largest card issuer in the United States, found evidence to dispel some investor concerns that consumers had moved away from credit cards, JPMorgan’s Lake said.
“The younger generations,” Lake said, “contrary to popular myth, are not averse to credit or credit cards.” Millennials and Gen-Zers among Chase customers spend 60% of their spending on credit cards. And they borrow more as they get older, she said.
Now, some investors fear the banks are getting too much of a boost from promoting credit cards just as the risk of recession is rising with the Federal Reserve’s policy tightening.
Banks say they learned from the financial crisis that knowing who to lend how much is more important to profits than trying to anticipate recessions.
Although card default rates have increased over the past three quarters, they are still below pre-pandemic levels, according to TransUnion data. Credit card bad debt charge rates at banks rose in the first quarter to 1.82% from 1.57%, according to Federal Reserve data. That’s half of what they were before the pandemic and low enough for the banks to make money.
For now, unemployment, a big driver of credit card losses, is low and wages are rising, Barclays’ Goldberg noted.
“In the short term,” Goldberg said, “it should be a pretty profitable business. But banks need to be aware of the upcoming financial downturn.
By David Henry