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Credit card companies poised for huge profit boost

by Peter Andrew

Earlier this month, Moody's, a credit ratings agency, unveiled its forecasts for America's big-six credit card companies. And its predictions were extraordinary.

According to an April 10 MarketWatch report, the company expects these card issuers to experience in 2012:

  • An enormous 35 percent jump in pre-tax profits.
  • Growth of about 5 percent in interest-earning credit card balances.
  • A fall in charge-offs (when card companies write off uncollectible debt and pass it to debt collection specialists) of between 15 percent and 20 percent. That will bring the average charge-off rate to roughly 4.5 percent, down from its peak of 11 percent in the first quarter of 2010.

Of course, not all six of these card issuers are likely to be equally successful. Moody's expects the top performer to be American Express, while Capital One is predicted to fare the worst, partly due to its acquisition of HSBC's U.S. credit card portfolio.

Too good to be true?

Some of those figures sound optimistic. Can they possibly be accurate? Well, apparently yes. Just 3 days after the MarketWatch story, JPMorgan Chase & Co. published its latest results, and Chase cards looked set to do well, in spite of some headline figures being affected "by a lower reduction in the allowance for loan losses compared with the prior year," in the words of a company press release. Compared with the same period last year, in the first quarter of 2012 credit card sales volume rose 12 percent to $86.9 billion.

Other key figures from Chase's press release were:

  • New credit cards were issued to 1.7 million people.
  • Chase's credit card charge-off rate dropped to a very respectable 4.37 percent, significantly down from the same period in 2011 when it was 6.81 percent.
  • Only 2.55 percent of Chase's credit card accounts were delinquent (30 days or more past due), compared with 3.55 percent in the same quarter of 2011.

Why credit card companies are thriving

When the credit crunch hit, card issuers were faced with a perfect storm that challenged their revenues and profits from all angles:

  1. Consumer confidence was low, and spending on all cards fell off a cliff.
  2. People saw credit card debt as a particular evil, and paid down balances as fast as they could. As a result, revenues from interest charges dropped.
  3. Many found their credit card debt unmanageable and filed for bankruptcy, forcing card issuers to charge off billions of dollars in uncollectible debt.

What's happening now is close to a mirror image of that:

  1. As confidence returns with the (admittedly slow) economic recovery, people are again turning to plastic. With debit card interchange fees greatly reduced, they're being encouraged to use credit cards.
  2. That confidence is also reducing the urgency with which many people are paying down their credit card debt, while others are increasing it. That explains Moody's forecast of a 5 percent increase in card balances this year.
  3. Those with problem debt have largely been purged from the system, and cardholders today tend to be significantly more creditworthy.

There's another point: credit card interest rates are on average higher than they were a few years ago, so those who revolve balances are generally paying more to their issuers for the privilege.

So are credit card companies set for a bonanza? Looks like it.

Published 04/13/12 (Modified 05/02/12)

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