The cyclical recovery in credit card loan performance appears to have punched through seasonal patterns in recent months.
Balances that were overdue by 30 to 60 days were flat to down in securitization trusts at the major issuers, contrary to the climb that has historically prevailed during the third quarter, setting the stage for chargeoffs to likewise buck their typical rise in the coming months.
If the rate at which early stage delinquencies have been translating into debt that is deemed uncollectible five months later holds steady, chargeoff rates in the fourth quarter could average from 33 basis points lower than the third quarter for Citigroup Inc. to 109 basis points lower for Bank of America Corp. Almost all of the trusts could be headed toward further declines in the first two months of 2011 (see charts).
Assuming that the link between early stage delinquencies and chargeoffs will remain unchanged is unrealistic, of course — economic conditions and underwriting changes that have altered the strength of the mix of account holders weigh on the chances that late borrowers will recover, for instance.
Trusts are also an imperfect read on total portfolios, including receivables that do not back bonds. (For the most part during the 12 months through September, overall improvements in chargeoffs have outpaced improvements in trusts.) The chargeoff rate at JPMorgan Chase & Co.'s total portfolio, excluding accounts it acquired when it bought the banking operations of Washington Mutual Inc., fell 96 basis points from the second quarter to 8.06% in the third quarter, better than its July projection of about 8.5%. In its earnings report on Oct. 13, the company forecast a further decline to about 7.5% in the fourth quarter, and advised that, after flushing many weak borrowers out of the system, the improvement is unlikely to be bogged down by persistently high unemployment.
"Losses tend to relate more to new unemployment claims and new unemployment, not just absolute level," Jamie Dimon, the company's chief executive, said on a conference call with investors. "After two and a half years you charge off 20% so you really have worked through a lot of the bad accounts."
At Citigroup, where the North American chargeoff rate fell 108 basis points to 10.7%, John Gerspach, its chief financial officer, was more cautious. Essentially restating the guidance he gave after the second quarter, Gerspach told investors that the company expects credit losses to continue to decline but "remain at elevated levels until employment recovers."
B of A's chargeoff rate, which peaked far higher than competitors, plummeted 309 basis points to 9.12%. Its CEO Brian Moynihan said: "We're worse than other people in these statistics. We lag them. We're catching up faster."
At 5.2% in the third quarter, the chargeoff rate for American Express Co.'s U.S. credit cards was the lowest since the first quarter of 2008. The company projected that it would decline further in the final three months of the year, and said that because Amex has further concentrated its focus on higher-end borrowers and charge-card holders, chargeoffs could ultimately settle at levels below those that preceded the recession.