Higher August Charge-offs Blot Citi

Citigroup Inc. (C) has reported an increase in credit card charge-offs in August. Charge-offs − balances that are uncollectible by the company and are

subsequently written off − have increased to 11.18% in August from 9.75% in July at Citi. However, Citi’s delinquency rate for loans due over 30 days decreased to 4.95% in August from 5.3% in July.

The trends in credit card charge-offs and delinquency rates in Citi were similar to what other credit card lenders have experienced in August. Capital One Financial Corp. (COF), Discover Financial Services (DFS), Bank of America Corporation (BAC) and JPMorgan Chase & Co. (JPM) reported an uptick in net charge-offs in the month, though American Express Company (AXP) managed to keep its charge-offs rate steady in August. However, all of them have reported a decrease in delinquency rate.

Capital One’s charged-off rate increased to 8.19% in August from 8.13% in July. Charge-off rates at Bank of America increased to 11.73% from 11.39% in July. JPMorgan’s charge-off rates moved up to 8.18% in August from 7.95% in July. Discover reported a charge-off rate of 7.98% in August, up from 7.28% in July. Charge-off rates at American Express were unchanged at 5.5% in August.

Considering the delinquency rate at Capital One, we see that it has decreased to 4.56% in August from 4.66% in July. The rate at Bank of America fell to 5.68% from 5.92% in July. JPMorgan’s delinquency rate fell to 3.89% from 4.06% while that at Discover decreased to 4.47% in August from 4.72% in July. American Express’ delinquencies fell to 2.4% from 2.6%. Though delinquency rates have dipped in August, it is to be noted that the pace of decline in the rates have somewhat moderated from the prior months.

The economic downturn and the high levels of unemployment led to customers defaulting on their credit card payments. As a result, banks have recorded significant charge-offs in the previous years. Of late, the credit card lenders have seen an improvement in charge-off rates, which was slightly reversed with the uptick in August.

However, there is a ray of hope as credit card lenders have witnessed a fall in the delinquency rates. Typically, delinquency means the failure to make a payment on an obligation when due.

We think that the drop in delinquency rate is a good sign of the overall health of the economy. It implies that people are making payments and therefore the chances of loans being charged off in future decreases. However, the pace is slow, indicating that economic recovery is listless at best and that ample time would be required before it picks up momentum. While the improvement in credit card delinquencies is encouraging, the concern now seems with the weak demand for new loans, which results from the serious challenges to economic recovery.

CITIGROUP INC (C): Free Stock Analysis Report

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