The banking industry gave investors good news this week, updating the Fed with improving credit card late payment and default data. Falling late payments suggest banks will continue to benefit from declining charge-off headwinds over the coming two quarters, bullish for earnings and stock prices at companies including American Express (AXP), Discover Financial Services (DFS) and JP Morgan (JPM).
American Express posted the best late payment ratio in May. The measure fell to 1.6% from 1.7% in April. At JP Morgan, the rate fell to 2.66%. Over at Discover, the 2.88% rate was the company's lowest in 4 years. Even the more troubled Bank of America (BAC) saw its late payment rate fall to 4.28% from 4.52%.
During the recession, the late payment rate peaked at 6.61% before falling to 3.89% at the end of Q1. As this rate has dropped, issuers have been able to recapture loan loss reserves thanks to fewer defaults.
Of the six big credit card issuers, Discover trailed only Amex for the fewest charge-offs in May, writing off at a 4.82% annualized rate - much better than the 6.96% industry rate in Q1. And, Bank of America's default rate - the highest of the big six issuers- fell to 8.03%, which as high as it seems, puts it about in line with 2007.
Falling defaults, in part, are thanks to Issuers having cleaned up a lot of risk during 2009 and 2010. Overall, the industry wrote off $75 billion worth of bad credit card debt. And, consumers have done their part to make their balance sheets healthier too.
Household debt service payments as a percentage of disposable personal income has declined from nearly 14% entering recession to 11.75% exiting last year. And, total consumer credit outstanding has increased for 7 consecutive months. Despite this, total revolving credit outstanding has fallen from nearly a trillion dollars entering recession to $790 billion through April. Consumers remain cautious with their spending, but also remain willing to borrow - an early cycle dynamic good for issuer earnings and far less frothy than 2007 and 2008.
To meet the demand of non-struggling consumers, the industry is easing standards. The percentage of domestic respondents tightening consumer loans and credit card standards is down -20.5% so far in Q2, after falling -10% in both Q1 and Q4, 2010. This is down from a peak above 60% at the height of the recession. Issuers have unlocked access to credit, yet are approaching consumers more intelligently. In short, issuers are willing to lend to those lower risk consumers willing to spend.
Clearly, there remains work to be done. Jobs growth will need to continue to offset lost government jobs and sidelined investors hurt by poor performance this quarter will take time to return to the group. But, as we move into Q3, credit card issuers like JP Morgan and Discover are likely to post better-than-expected earnings and higher stock prices as late payments continue to curtail write-offs.