Big U.S. Banks, including JPMorgan Chase & Co (JPM.N) and Citigroup (C. N), appear set for some earnings boost from a pickup in the battered credit-card business. But a recession would pull consumers back and bring losses on outstanding loans.
JPMorgan Chairman and CEO Jamie Dimon warned of growing recession risks and braced investors for a likely “hurricane.” In steady economic times, cards are one of the most profitable businesses for banks. The analysts say a continued upturn in card borrowing would bring relief for banks.
When consumer spending crashed during the pandemic, Citigroup marked a low point. As 2020 ended with a 13% fall in quarterly revenue from U.S. Citi-branded cards from a year earlier.
Overall balances on credit cards and similar loans at U.S. banks are up 15%. As of May 25, from a year earlier, and back near pre-pandemic levels, according to Federal Reserve data. Cardholders now allow more of those balances to revolve and incur interest charges instead of paying them off monthly. While banks rarely disclose the size of revolving balances. It is critical because the interest from revolving accounts brings in much more revenue than transaction fees from merchants. Some of which are shared with card networks, such as Visa and Mastercard.
During pandemic lockdowns, consumers reduced credit card spending and paid down balances like never. Thanks to stimulus payments and cash from refinancing mortgages.
Banks say cardholders are paying off their debts a little more slowly now, resulting in higher interest-bearing balances. Discover Financial Services, for example, said payment rates were still significantly higher than before the pandemic but had leveled off and even eased slightly in the first quarter.
The banks say they learned from the financial crisis, that knowing whom to lend how much is more important to profits than trying to anticipate recessions.
While card delinquency rates have risen in the past three quarters, they are still below pre-pandemic levels, according to TransUnion data.
For now, unemployment, a big driver of losses on credit cards, is low and wages are rising, noted Barclays’ Goldberg.
-Reuters.
