Some Banks Never Learn

Includes: COF, WMIH
by: Markham Lee

A recent article in the Boston Globe discusses how banks have increased the number of credit card offers direct towards subprime borrowers, whilst decreasing the number of offers directed towards prime borrowers over the same time period.

From the Boston Globe:

As subprime borrowers began to default on their mortgages in rapidly growing numbers this year, credit card issuers increased their efforts to sign up such customers with tarnished financial histories, according to a market research firm.

Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006, according to Mintel International Group. Direct mail offers targeted at customers with the best credit fell more than 13 percent.

Yet, during this same period, defaults on subprime mortgages, which charge higher interest rates because the borrowers' blemished credit makes them bigger risks, rose significantly. In June, nearly 1 in 5 subprime mortgages were at least 60 days past due, and more than 1 in 20 were in foreclosure, according to First American LoanPerformance, a San Francisco firm that collects and analyzes mortgage data.


HSBC Holdings PLC (HBC) of London leads the direct mail surge, according to Mintel. Its mail offers to subprime households in the first six months of the year more than doubled from 2006. A spokeswoman said, "HSBC's card and retail services business is a full spectrum credit lender, providing credit cards to prime, near-prime, and subprime customers. We don't ever comment, however, on our proprietary marketing information.

Capital One Financial Corp.'s (NYSE:COF) subprime mailings rose 18 percent in the same period. A spokeswoman said the McLean, Va., firm offers competitive and responsible products to a variety of market segments.

Washington Mutual Inc.'s (NYSE:WM) subprime mailings rose 35 percent. A spokesman, however, said the Seattle-based bank targets customers with credit scores above 600, which is the upper range of the subprime market.

Let’s think about this for a second, these are banks that have all gotten their fingers burned with subprime mortgages (add in subprime auto loans for Capital One) and their response is to go back out and originate credit cards to the same group of people, many of whom probably have ARM and Negative ARM mortgage time bombs to deal with, are no longer able to use HELOCs to finance their lifestyle/get out of credit card debt, are squeezed financially and will probably use their new credit cards to pay bills?

Finally, over that same time period, credit card offers to borrowers with good credit actually decreased, in other words some banks are actually working towards reducing the credit quality of their revolving debt portfolios. It almost boggles the mind to think that these companies are actually trying to increase the number of credit cards they issue to the borrowers with the worse credit ratings, at a time when for the industry as a whole, credit card defaults have increased substantially. Perhaps they missed the report in the Financial Times noting that the number of credit card accounts in default increased by 30% during the first half of 2007 on a YoY basis.

It seems that the prospect of a consumer credit bubble becomes more of a reality on a daily basis, as it becomes more and more apparent that the banking industry haven’t learned from their prior mistakes with respect to focusing on short-term profits over long-term sustainability.


  • The Boston Globe: “Credit card companies woo struggling mortgage-holders” – September 4, 2007
  • The Financial Times: “Credit-card defaults on rise in US” – August 27, 2007
  • Disclosure: The Author doesn’t own positions in any of the companies mentioned in this article.