Monday, May 11, 2009

Rising Credit Card Losses Are Next Challenge For Banks


It used to be that the card industry could predict credit-card losses by tracking the unemployment rate. No more. During the most recent earnings season, card issuer after card issuer talked about loss rates outpacing unemployment rates in the near future. The upshot is that it'll be a lot more difficult to predict just how bad -- and how high -- loss rates will ultimately get.

From the New York Times:

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capitol One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.

Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.

And, so, cardholders should continue to expect reduced credit limits and tougher approvals. In other words, the beat goes on.

Read the whole story here.

18 comments:

  1. HSBC Says 2009 Will Be ‘Tough’ as U.S. Bad Debts Rise

    http://www.bloomberg.com/apps/news?pid=20601085&sid=a0RC5rtqYWdM&refer=europe

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  2. It's their own damn fault. Many of these banks are responsible for hosing up the housing market, making 20% of underwater homeowners (30% here in California) look at their house values and contemplate bankruptcy. Now they've stressed out cardholders finances by raising rates and fees for such reasons as "economic climate."

    On top of this, they've used public funds to prop themselves up, while homeowners are left holding the bag. Oh yeah, and I think they're responsible for the decline in business investment from smaller businesses who relied on them for credit. They now charge 15-30% for money that costs them .5% to borrow, right?

    If you were one of these 20%/30% homeowners with the average credit card debt of around $7,000, wouldn't you consider bankruptcy? If your personal finances were run like a business, wouldn't you feel it was your *responsibility" to your investors (your family) to declare bankruptcy under these conditions? And why should the banks care? There's no downside when the government shovels in the money.

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  3. Hey BlackDiamond, I'm not arguing. And very well put.

    b_in_sc

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  4. where's that 'global economy reset button' on my keyboard...? I keep looking for it, but I can't see to find it..

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  5. Or for those who have the green "Oh Sh*t" key, works just as well..

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  6. Oh, and sorry for the rant. It seemed reasonable at the time.

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  7. "They now charge 15-30% for money that costs them .5% to borrow, right?"

    The banks borrowing costs have gone up, not down.

    The so called "bailout" not directly used to lend, rather its used to keep the banks solvent.

    Also, the banks did not make people purchase homes they could not afford. In a sense the lenders are victims or a greedy public that gambled in the housing market.

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  8. Well, there is plenty of blame to go around. Neither the banks or the public are innocent in all this. The banks made it a little too easy to get loans, with their low docs, no docs loans, not to metion the ballon, interest only or ARM mortgages they offered. AND the public went into a mass feeding frenzy, eating all the lies and BS from the banks. Most people who couldnt afford a home shouldnt have even been in the "market". We saw it all too often on CB "I have a 580 credit score but only need a 620 to buy a house". Normally there is a reason you only have a 580 credit score (and I have been there myself so speaking from personal experience here) and at that point should fix your finances BEFORE you buy a home, not JUST to buy a home. Other people were lulled into the false sense of security of the houseing market always rising. "We will sell before the mortgage resets and make a profit" was the chant that I tried warning people away from in 2006. I told them not to count on something that wasn't a guarantee. Now those same people are stuck in a home they cant sell but cant afford either. Hate to say I told you so....
    The issues with the credit cards is that now the banks are reaping what they sowed in so many ways. I dont believe that there is any need to raise rates, especially on those who are not behind or having issues. The slashing limits I can see to minimize risks but some of them are not thinking about the risk really. They are just looking to make the most money they can before it all blows up in their face. I dont think we have seen the worst yet. I am sure they (banks) will come up with new and more profitable ideas to rake the public over the coals even more now.

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  9. "Also, the banks did not make people purchase homes they could not afford."

    No, and those people who defaulted have their own set of issues. If you played by the rules, and you still pay your mortgage, there's a chance you've been financially devastated based entirely on the timing of when you bought your home. For example, my house has lost 4 years of value from its high. If I had bought that house anytime in the last four years, I'm underwater.

    "The so called "bailout" not directly used to lend, rather its used to keep the banks solvent."

    Wouldn't you act a bit more aggressively if you had a giant safety net to bail you out?

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  10. In other words BlackDiamond " the banks can't loose"

    Kinda like the Health care announcment today claiming the industry will be reducing health care costs by 2 billion over the next 10 years.

    Betcha there is bail out money comming for health care as well.

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  11. "...there's a chance you've been financially devastated based entirely on the timing of when you bought your home. For example, my house has lost 4 years of value from its high."

    Yeah, but so what? The guy that gambled in Vegas may walk away financially devastated too. Its not the banks fault that people did not take seriously the risk that their house may lose value. Its not like this has never happened before either, it has happened numerous times (especially in California).

    "Wouldn't you act a bit more aggressively if you had a giant safety net to bail you out?"

    I don't know what you mean by this, without the bailout many of the banks would not exist. They are doing whatever they can to remove their dependency on the government.


    "They are just looking to make the most money they can before it all blows up in their face."

    Considering how badly the banks credit card division is doing, I really don't see why people interpret it has "just looking to make the most money they can", rather than "adjusting to the current market place to prevent massive loses".

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  12. Carnap

    It is the banks fault and here is why. In theory a casino will let you gamble because they know the odds, they like the odds, and although they occasionally take a loss they have calculated their risk and make sure they win in the end.

    A bank should not let a consumer gamble, if they do they better know the risks and be ready to deal with them if they don't pan out. The banks allowed consumers to gamble with the banks money and the gamble didn't pay off. They can't now turn around and even put an ounce of blame on the consumer. They were in control. After the loan is given consumers have the right to either pay or give back the house. That's how it works. To many people are giving the house back, which is their contractual right, and the banks weren't prepared.

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  13. Good point Carnap.

    In the past banks were smart enough to set the borrower up to succeed. Now greed has taken over as the primary incentive , and even though the banks had access to more detailed economic information than the average consumer ( trends, indicators, etc) and could see the shift to less stable monetary ground they still continued to lend.

    Additionally, gambling is cash in, cash out. No real property changes hands, no contract is signed, no long term commitment.

    If banks want to treat borrowers, real property, or even entire neighborhoods as a gamble, maybe they should be required to get a gaming license.

    Casino of America ? CasinoBank ? Change the business model and it would make sense...

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  14. Parkaboy I take it you agree with me and not carnap from the content of your paragraph. You are absolutely right. The day professionals start playing the victim we have a problem on our hands. They should know how to set people up with good financial products and loans. If they don't they need to get into another business. Just handing out money and then playing the victim and saying statements like "there is plenty of blame to go around" will not get it done.

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  15. Correct you are. Sam said....

    I especially agree with the Bank being in control. The bank truly owns the asset until the borrower pays in full. With a 30 yr mortgage, the banks are on the hook either way for several decades. As costs for homes escalate the banks will have to take more responsibility, like it or not.

    I have heard of 40-50 mortages: guessing the banks are rethinking that one.

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  16. Sam, you are right. "Too many people are giving the house back, which is their contractual right, and the banks weren't prepared."

    But housing prices have dropped, in the past, without destroying the economy.

    Why is this time different?

    Answer: the bankers invented a new casino game (credit default swaps) and used it to build a SIXTY TRILLION DOLLAR tower of derivatives.

    When the ground under the tower (the housing market) shrugged, the tower fell.

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