CREDIT CARD BANKS TO INCREASE PROFITS

June 30, 2001

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Credit card companies are expected to post a double-digit rise in profits during the second quarter, as lending gets cheaper, but things will get tougher toward the end of the year amid rising bankruptcies and loan defaults, according to Reuters, as reported by the American Bankruptcy Institute.

Leading credit card issuers like MBNA Corp., Capital One Financial Corp. and Providian Financial Corp. also are benefiting from tightened lending terms and stiff late-payment fees they have slapped on customers in recent years.

The ongoing rise in charge-offs (loans that go bad) and rising bankruptcy rates could hurt credit quality and curtail the sector’s growth toward the end of 2001, reported Reuters.

Unemployment, which has been creeping up in recent months, could spur more defaults, they fear. On the flip side, falling interest rates have boosted credit card companies’ profits so far this year. The Federal Reserve on Wednesday reduced interest rates for a sixth time since Jan. 3. U.S. credit card portfolio losses hit a four-year high in April amid rising unemployment, higher fuel prices, and the slumping stock market, according to Standard & Poor’s Corp. The monthly charge-off rate rose 0.6 percentage points to 6.7 percent in April from March.

Bankruptcies may be the boogeyman of the high-end issuer, analysts said. Indeed, bankruptcies make up 40-50 percent of the losses in prime credit card portfolios, but only 15 percent in non-prime or sub-prime portfolios, according to Barklays Capital. Higher income folk also have racked up more debt compared with their lower-income counterparts.

Saving rates fell from 8.5 percent in the early 1990s to minus 2.1 percent last year for the highest income group in the United States, Barklays said. Meanwhile, the middle and lowest income groups saw their savings rates go up during the same period, Barklays said.