Deterioration of Consumer Credit Will Spell More Bad News for Credit Card Issuers

According to reports from Moody’s (NYSE:MCO) Investors Service, credit card delinquencies surged to record levels in August. In the first increase of charge-off rates since the rally began in March, credit card issuers wrote off 11.49% of uncollectible consumer debt compared to 10.52% in July. Also loans more than 30-days past due also rose to 5.8%. Moody’s report also suggests that charge off rates are not likely to peak until mid-2010, as unemployment continues to strain many consumers budgets.

Write-offs rose to 11.49 percent from 10.52 percent in July, Moody’s said today in a report. Loans at least 30 days delinquent rose to 5.8 percent from 5.73 percent. “Early- stage” delinquencies, or loans overdue 30 to 59 days, surged to 1.65 percent, from 1.41 percent, signaling higher losses in coming months. Banks typically write off loans after 180 days.

Card issuers have struggled with rising defaults as the recession drove up unemployment to 9.7 percent and the impact of income tax refunds waned. Credit-card defaults typically track the U.S. jobless rate since consumers tend to fall behind on payments when their income dries up.

“We continue to call for a recovery of the credit-card sector to begin once industry average charge-offs peak in mid- 2010 between 12 percent and 13 percent,” said the Moody’s report, which predicted unemployment may reach 10.5 percent. — 9/23/2009

This deterioration of consumer credit could spell bad news for credit card issuers and banks with heavy exposure to credit card debt. As you might expect, American Express (NYSE:AXP), Mastercard (NYSE:MA), Visa (NYSE:V), Capital One (NYSE:COF) and Discover Financial (NYSE:DFS) all sold off sharply after the announcement was made on Wednesday afternoon. Also, the two largest holders of credit card debt JP Morgan (NYSE:JPM) and Citigroup (NYSE:C) also sold off in afternoon trading.

The latest data out of Moody’s suggests that investors should remain wary of company’s heavily tied to consumer debt. More jobs are being lost each month and even with the pace of those losses slowing, it must be a concern to creditors. Given the run that each of the previously mentioned stocks, we would seriously wonder if the market has prematurely assumed that the family balance sheet has improved substantially. Furthermore, the earning power of these companies could be diminished going forward if consumers are more spend-thrift going forward. A climbing savings rate suggests that consumers may be less likely to turn to the plastic for any unnecessary purchases.

Record Credit Card Defaults Signals a Weaker Recovery

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.