Are the Banks’ Credit Card Portfolios Really Improving?

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Rising home foreclosures was of course the main catalyst of the financial crisis. But credit card debt was also a big problem for the banks as more people lost their jobs and were unable to pay back all the boats and xboxes they had rung up on plastic. So the news a month or so ago that credit card delinquency rates were falling was another welcome sign that problems for the banks were easing. This from the Financial Times:

Delinquency rates at major US credit card issuers declined in March in yet another sign that the economy is on the mend.

Bank of America, JPMorgan Chase, American Express, Capital One and Discover Financial Services each reported a slight decline in the percentage of card payments that were at least 30 days late, a leading indicator of consumers’ financial health.

The results echo comments made on Wednesday by Jamie Dimon, JPMorgan chief executive, and Ben Bernanke, chairman of the Federal Reserve, about how the economy is showing signs of a rebound.

“There are strong indications that not only the economy but the financial condition of individual households is starting to improve,” said Stephen Brobeck, the executive director of the Consumer Federation of America, a lobbying group. “Consumers are increasing their spending and yet at the same time reducing loan delinquencies.”

Turns out that optimism may have been a little premature. Two new takes on credit card data suggest that the bank’s card portfolios may not actually be getting better. One of the studies suggests that the household debt levels may start to climb again soon. Here’s why:

The first examination of credit card data comes from William Moreland. His website has lots of info on the banks and their loan portfolios all coming from the FDIC. Moreland points out that if you take a look at the credit card portfolios of the banks in the first quarter, the data from the FDIC shows a huge jump in credit card balances.

Credit Card Loan Balances at Top 100 U.S. Banks

Moreland points out that’s not because the banks have lent any more money. It’s because of an accounting rule that forced the banks to bring nearly $300 billion worth of credit card loans they had already made onto their balance sheets. Before the banks were allowed to hide these loans in special purposed entities and not record their loans on their financial statements, saving the banks from having to raise capital to cover the potential losses. But in the wake of the financial crisis the Financial Accounting Standards Board is tightening its rules, and one of the changes is that the banks now have to actually tell shareholders about all the loans they have made. Go figure.

The accounting rule has no real affect on the banks’ businesses. The loans after all were there all along, just hidden. But it could have a significant affect in the delinquency rate, which is calculated by dividing the volume of loans (in this card credit card) a bank has outstanding by the volume of loans on which customers are no longer making payments. What matters is the quality of the loan portfolio that the banks had held off their balance sheets. If the quality was higher, then it is going to look like delinquency rates improved when they didn’t. Along with the nearly $300 billion jump in credit card balances, the banks added $7.8 billion in delinquent loans to their books. That means even if all those loans that consumers were behind on came from the off-the-books stuff, the loans being added had a delinquency rate of 2.5%. That’s significantly better than the 3.4% delinquency rate the banks had in the 4th quarter of 2009, according to the FDIC. But it is likely that at least some of those newly delinquent loans came from the pool of loans that was already on the banks’ books. That means that the delinquency rate of the new pool of loans was actually probably lower than 2.5%, and therefore would make the banks’ credit card portfolio appear to be improving when they weren’t.

Odysseas Papadimitriou, who runs the website CardHub, has another data point to show that the credit card picture may not be getting rosier, infact it might be on the verge of getting much worse. You may remember that Papadimitriou had an interesting study a few months ago showing that consumers were not paying off their credit card balances as fast as everybody thought. Well he is back with a new study of loan balances of the first quarter. Like the other study, he finds that we are not paying down debt as fast as it looks like. According to Cardhub, Credit card balances fell $51 billion in the first quarter of 2010. A little more than half of that drop $29 billion came from customers paying down their balances. The rest came from charge offs by the banks. That seems like good news. In all of 2009, credit card balances dropped by just less than $100 billion, but just 10% of that drop came from consumers paying down their balances. The problem is that the first quarter has traditional been when customers make the biggest strides in paying off their balances. Tax returns come back. People are spending less than during the holiday season.

Compare 2010 1st Q to 2009 1st Q and the 50-50 ratio of balance repayment-to-charge offs doesn’t look as good. In the 1st quarter of 2009, customers paid off $47 billion in credit card debt, or 73% of the drop in card balances. And remember that was the first quarter of 2009, when the economy was really in the dumps now. Papadimitriou says the fact that customers paying off their debt contributed less now to the drop in card balances at a time when the economy is improving is a bad sign, and a signal that the consumer debt picture could be getting worse, not better.