Some banks see consumers paying off more credit-card debt
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Last Update: 4:37 PM ET Apr 19, 2006
NEW YORK (MarketWatch) -- In a development that could erode credit-card industry profits, U.S. consumers are paying down more of their monthly bills, according to two of the country's biggest issuers.
JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) reported this week that their total outstanding card loans declined during the first quarter. At JPMorgan, card loans fell $8 billion, or 6%, to $134.3 billion at the end of March. The decline at Citigroup was $5.7 billion, or 4%, leaving its outstanding balance at almost $136 billion.
Executives at both banks attributed the declining balances to rising payment rates by consumers, a problem because issuers earn more money when balances are higher. The trend has been developing for several months, with a number of banks last quarter reporting a similar phenomenon. But the magnitude of the first-quarter dropoff surprised bankers, analysts and other experts, who have grown accustomed to consumers racking up credit-card and other debt.
John McDonald, a Banc of America Securities analyst, described the lower first-quarter loan balance at JPMorgan as "an alarming drop." JPMorgan Chief Executive James Dimon warned that the trend could could make it harder for the company's card unit to reach its profit targets. And Citigroup Chief Financial Officer Sallie Krawcheck said that the rising payment rate "makes it a little bit tougher in terms of the revenue perspective."
Americans have become notorious for their free-spending ways. The U.S. saving rate last year slipped into negative territory for the first time since 1933, indicating that consumers were spending more than they earned.
That has helped the credit-card industry rake in huge profits. Card companies rely largely on the hefty fees and interest rates they charge consumers who run up big balances. Rising payment rates therefore could crimp profits.
The causes of the banks' declining credit-card balances aren't entirely clear. One likely factor is that credit-card balances tend to balloon around the holiday shopping season in the fourth quarter and then taper off. Another contributor is the higher minimum monthly payments that card companies began phasing in last year to comply with new regulatory guidelines.
But bank executives say those factors don't fully explain the recent trend, and they're stumped about the root causes.
"It's more than that in this period," said Michael Cavanagh, JPMorgan's chief financial officer, referring to a post-Christmas slowdown and the new minimum-payment rules. "There are broader factors that seem to be affecting us and our competitors here."
Cavanagh predicted that the higher payment rates, which he described as an industrywide phenomenon, would persist at least through the second quarter.
Curtis Arnold, a consumer advocate and founder of CardRatings.com, said the higher payments reported by Citigroup and JPMorgan are a good sign. He said consumers apparently are learning about the dangers of excessive debt.
"I do think some consumers have heeded the warnings," Arnold said. "I think that message is starting to get out there."
The actual impact on card companies' profits remains to be seen. Already, many big banks have cautioned that their results will be pinched by rising payment rates caused by new minimum-payment requirements - but those effects aren't expected to kick in until the second half of the year. Those losses could swamp the gains banks are currently enjoying as a result of a steep decline in bankruptcy filings following a new law making it harder for people wipe away their debts.
On the other hand, the card companies may be able to make up for that lost income by hiking other fees. Arnold said some issuers already have boosted the fees they assess when customers transfer card balances between different accounts.
One key question mark is whether other major card companies also are seeing consumers paying off more of their bills. Bank of America Corp. (BAC), the nation's biggest card issuer thanks to its recent acquisition of MBNA Corp., reports its first-quarter earnings Thursday morning. Capital One (COF), another major issuer, also reports earnings Thursday. |
