Q2 2015 Banking Review: Credit Card Charge-Off Rates

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Credit card charge-off rates for the country’s largest card lenders nudged lower over the second quarter of the year, reversing the trend of sequential increases over the previous two quarters. While the seasonal card industry has historically reported elevated charge-off levels for the first quarter, steady improvements in overall economic conditions helped keep card default rates stable the last few quarters.

In this article, which is a part of our ongoing series detailing the country’s largest card lenders – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), American Express (NYSE:AXP), Discover (NYSE:DFS) and Capital One (NYSE:COF) – we discuss the trend in their credit card charge-off rates over recent years, and also detail what to expect in the near future.

See the full Trefis analysis for Capital OneJPMorganU.S. BancorpWells Fargo | Bank of AmericaCitigroupAmerican ExpressDiscover

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The charge-off rate is often used as a parameter to gauge the quality of a lender’s loan portfolio, as it represents the proportion of loans which the lender is forced to write off for a given period. A lender with a higher charge-off rate historically is likely to see a larger hit in profitability in the event of weak economic conditions, as it usually indicates more relaxed lending standards. On the other hand, lenders that follow strict lending guidelines are expected to see lower loan charge-offs compared to their peers.

An important factor behind the notable increase in profitability for the credit card industry over recent years has been the marked reduction in loan charge-off rates from the highs witnessed in late 2010. In the aftermath of the economic downturn, many cardholders defaulted on their obligations. But as economic conditions improved, the volume of bad loans began to shrink steadily – allowing card lenders to report credit card charge-off rates that are currently near historic lows.

The table below summarizes the net charge-off rate for these eight lenders in each of the last ten quarters. The data has been compiled using figures reported by individual institutions as a part of their quarterly announcements. The weighted average charge-off rate is the ratio of the total charge-off for all lenders with the total outstanding card balance.

Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15
Citigroup 4.39% 4.24% 3.88% 3.76% 4.06% 4.04% 3.93% 3.69% 3.68% 3.76%
U.S. Bancorp 3.68% 4.02% 3.62% 3.61% 3.77% 3.78% 3.45% 3.46% 3.58% 3.76%
Wells Fargo 3.90% 3.90% 3.31% 3.40% 3.52% 3.19% 2.90% 3.00% 3.15% 3.20%
Capital One 4.45% 4.36% 3.78% 3.98% 4.02% 3.56% 2.88% 3.38% 3.48% 3.35%
Bank of America 4.12% 4.07% 3.49% 3.23% 3.14% 2.93% 2.75% 2.65% 2.70% 2.61%
JPMorgan 3.50% 3.30% 2.88% 2.87% 2.88% 2.86% 2.53% 2.69% 2.52% 2.57%
Discover 2.36% 2.34% 2.05% 2.09% 2.32% 2.33% 2.16% 2.26% 2.40% 2.28%
American Express 1.90% 2.00% 1.70% 1.60% 1.70% 1.60% 1.50% 1.40% 1.50% 1.40%
Weighted Average 3.71% 3.62% 3.18% 3.14% 3.23% 3.10% 2.84% 2.87% 2.88% 2.86%

The overall reduction in charge-off rates over recent quarters is evident from the table. The charge-off rates for individual lenders varies from a high of almost 3.8% (for Citigroup) to 1.4% (for American Express) as a result of marked differences in card lending policies as well as geographical diversification. Citigroup’s geographically diversified credit card business is more prone to loan losses – especially in developing nations. In sharp contrast, American Express’s focus on affluent clients acts as a protection against loan losses.

The graph below makes it easier to compare the relative changes in these lenders’ charge-off rates from early 2011.

CardChargeOffs 15Q2

Notably, the relative position of the lenders with respect to each other has remained largely unchanged over the years – reinforcing the fact that charge-off rates are primarily dependent on how strict or lax a lender is about its card issuing criteria. The erratic trend displayed by Bank of America is due to the bank’s decision to exit its international card business in late 2011, while Capital One’s charge-off rate jumped in 2012 due to its acquisition of HSBC’s card business. Also, the prominent uptrend in charge-off rates for Wells Fargo and U.S. Bancorp over recent quarters indicates that the two banks may have been relaxing their card lending policies over the period to gain a larger share of the credit card market.

The weighted average card charge-off rates have remained roughly constant over the last four quarters – indicating that the lingering impact of the economic downturn is mostly gone. Given the gradual economic growth in the U.S. as well as the outlook for the future, we expect card charge-offs to remain around current levels for the foreseeable future.

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