After writing off a record $89 billion in 2009, U.S. credit card issuers are dumping risky customers and competing to sign up richer, more-stable payers.
By Lisa Kassenaar Bloomberg Markets, June 2010
William “Wild Bill” Janklow’s law office in Sioux Falls, South Dakota, is crowded with mementos from his 16 years as a Republican governor. On a low, wooden bookcase, near bottles of hot sauce custom labeled for his annual Buffalo Roundup, he keeps a 4-foot length of red ribbon festooned with Citibank credit cards.
Janklow is the politician who, in 1981, brought Citibank to South Dakota. When he cut that ribbon to welcome the New York- based bank, he blew the lid off the U.S. credit card business, Bloomberg Markets reports in its June Issue.
The law inviting Citibank to South Dakota threw out limits on how much interest the state’s banks could charge borrowers -- rules known as usury caps.
“Citi wanted the invitation, and they knew what we were doing with rates,” Janklow says. In a secret meeting at the governor’s residence with Walter Wriston, chief executive officer of Citicorp, the bank’s parent, Janklow agreed to drive through the legislation in a swap for 400 jobs.
“That was the deal,” Janklow says. “You have no idea, in a state of 750,000, how many 400 jobs is, all in one place.”
The business Janklow and Wriston set in motion with a handshake that evening transformed U.S. consumer lending. Once interest rates were allowed to rise as high as banks could push them, credit cards became a ticket to enormous profit. In the decade ended on Dec. 31, 2007, credit card issuers together earned more than $50 billion, mostly on the difference between their own cost of money and consumer rates of as much as 30 percent. So-called subprime lenders pitched rates as high as 80 percent. At JPMorgan Chase & Co., cards accounted for 20 percent of both revenue and profits in 2007.
Profit Driver
“The credit card business has been a critical driver for these companies; it was the single most profitable product in the lending arena next to mortgages,” says Richard Bove, an analyst at Rochdale Securities in Lutz, Florida.
Then the harshest economic decline since the 1930s crushed the job market, and a record number of card holders stopped paying their bills. The three biggest card-issuing banks lost at least $7.3 billion on cards in 2009. Bank of America Corp., after earning $4.3 billion on cards in 2007 -- a third of its total profit -- swung to a $5.5 billion loss in 2009. JPMorgan Chase lost $2.2 billion last year on cards and, in mid-April, reported a $303 million loss for the first quarter.
“We have a business that is hemorrhaging money,” says Paul Galant, CEO of Citigroup Inc.’s card unit, where Citi- branded cards lost $75 million last year. The bank won’t disclose how much it lost on cards it issued under the names of retail stores.
$89 Billion
At the same time, the card issuers’ bottom line is being hurt by a new federal law forcing them to be more transparent about fees and interest charges. U.S. credit card issuers wrote off a record total of $89 billion in card debt in 2009 after losing $56 billion in 2008, according to R.K. Hammer Investment Bankers, a Thousand Oaks, California-based adviser to card issuers.
U.S. credit card delinquencies and write-offs tend to track the national jobless rate. When unemployment jumped to 10.1 percent in October, card industry loan write-offs hit 10.4 percent, according to estimates from Moody’s Investors Service.
American Express Co., Capital One Financial Corp. and Discover Financial Services, which only in recent years became banks, fared better than Bank of America, Chase and Citigroup. They made money in 2009 after more-cautious lending during the boom years, which limited the rise in defaults. The sea of red ink began to recede in the first quarter for Charlotte, North Carolina-based Bank of America. It reported $952 million in profit from cards in the quarter after releasing reserves set aside in 2009 to cover future defaults.
Goldman Suit
Turning around their card units may be more important than ever to the banks in the wake of the U.S. Securities and Exchange Commission’s lawsuit accusing Goldman Sachs Group Inc. of fraud, says Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. The case is focusing Washington’s lens on regulating the derivatives market, which could weigh on the big banks’ trading operations, he says.
“I look at cards as able to do well when other parts of the business aren’t,” says Holland, who owns shares of JPMorgan. Still, he thinks the days of immense profits in cards may be over. “The future may not be as good as the past,” Holland says.
As the economy revives, defaults will ease. Washington’s assault on the industry may not. In February, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act wiped out many of the banks’ most lucrative billing practices, including their ability to raise rates on existing debt at any time.
Click HERE to read the full version of this story
Read Full Article »