Rising unemployment will push up the losses on credit card portfolios while shrinking consumer spending hurts profits, Fitch says. As banks seek to reduce their exposure to credit card losses, participation in Federal Reserve programs designed to increase consumer lending will likely decline, the ratings agency said in a report issued today.
“Recent revisions to unemployment expectations, following the unexpected pace of deterioration in the first quarter, indicate that significant pressure on card credit metrics will remain over the balance of 2009 and into 2010,” said Meghan Crowe, Senior Director at Fitch. “Furthermore, net charge-off levels will be hurt by industry portfolio contraction, which will make trends in absolute dollar losses more useful in coming quarters.”
It’s not just that losses are mounting. Consumers are using their credit cards less. This means trouble for anyone whose business model depends on making money from consumer credit.
Here’s more from Fitch:
Higher portfolio losses combined with lower spend volume and smaller loan portfolios are expected to challenge card segment profitability in 2009 and 2010. Purchase volume dropped an average of 5% sequentially at the top six card issuers in the fourth quarter of 2008, and fell another 14.2% in the first quarter of 2009. These spending trends are expected to continue over the balance of the year. Fitch expects issuers with less dependence on interest spread income, like American Express Company, will fare relatively better from an earnings standpoint.
Portfolio contraction is expected to reduce funding needs across the credit card industry in 2009. The Federal Reserve Board launched its Term Asset-Backed Securities Loan Facility (TALF) on March 3, 2009 in the hopes of expanding credit availability. On March 26, 2009, Citibank became the first credit card issuer to issue notes eligible for the TALF program, but other large credit card issuers have been noticeably absent from the program, as historically low interest rates continue to make deposits a more attractive funding source. Fitch believes the regulatory capital implications of the SFAS 140 amendment, which will require all off-balance sheet assets to be recorded on balance sheet, may make ABS issuance less attractive for some card issuers going forward.