The credit card industry is slowly turning a corner.
Card issuers as a whole this year are poised to reap "significantly higher profits," as long as consumer spending maintains its pace and borrowing picks up slightly, a new forecast suggests.
Major U.S. credit card issuers on average could see pretax profits increase by about 35% over last year, Moody's Investors Service said in an April 9 report.
After paying down their credit card debt and cleaning up their mortgage problems somewhat, "consumers are feeling more confident about their financial situations and are in a position to take on a bit more debt," Curt Beaudouin, a Moody's vice president and senior analyst and the report's author, tells PaymentsSource.
Credit card issuers' loan portfolios also are on track to increase about 5% in 2012 compared with last year, and that would mark a reversal from the previous three years, Beaudouin says.
The recession caused outstanding receivables to plummet beginning in 2009, and the trend continued through 2010, Federal Reserve data show. The rate of decline began to abate in 2011, and during the fourth quarter total outstanding revolving credit reversed directions, increasing 4% on an annualized basis, Moody's said.
"A 5% increase in loan balance isn't gangbusters but we are coming off the bottom," and all signs point to loan balances beginning to head in a positive direction, Beaudouin says.
A major plank in Moody's forecast is that issuers' credit performance is pristine following "portfolio cleansing" that washed out many overdue accounts, leaving a preponderance of "seasoned accounts of good quality and new loans underwritten to tighter lending standards," Moody's said in its report.
The forecast also depends the continuation of a gradual economic recovery, including a slightly improving jobs picture, the firm said.
The Fed's April 5 G.19 report cast a bit of a shadow on that outlook, as revolving consumer credit, about 98% of which involves credit cards, declined for the second consecutive month, to $798.6 billion in February, down 0.27% from $800.8 billion in January and from $803.8 billion in December.
"There are a lot of seasonal patterns in credit card borrowing, and the month-to-month numbers can move around," Beaudouin notes. "But the underlying trend we see is that we're getting to a place in the market economy where we are going to see an end to the deleveraging away from credit card debt."
On an individual basis, major credit card issuers' outstandings at the end of the year varied compared with the previous year, causing some market-share shifts.
According to Moody's analysis, Bank of America Corp.'s portfolio at the end of 2011 shrank 10.1%, to $102.3 billion from $113.8 billion a year earlier. JPMorgan Chase & Co.'s total outstandings fell 3.9%, to $132.3 billion from $137.7 billion, while Citigroup Inc.'s receivables declined 4.2%, to $118.7 billion from $123.9 billion.
American Express Co.'s outstandings rose 4.1%, to $53.7 billion from $51.6 billion, bumping its yearend total higher than that of Capital One Financial Corp., whose receivables declined 2%, to $52.9 billion from $53.8 billion.
Discover Financial Services saw its receivables increase by 3.1%, to $46.6 billion from $45.2 billion.
The emergence of digital and mobile payments eventually will provide a boost to credit card issuers, but the effect will not likely be measurable this year, Moody's said.
Amex and Discover are best positioned to reap profits from gains the financial services industry sees from the emergence of digital and mobile payments, Moody's forecasts. "Both have their own existing card-payment networks, can immediately capitalize on their merchant relationships, and are already working to offer consumers a digital-payments product," Moody's notes.
Amex last year introduced Serve, its digital wallet initiative. Discover is part of the Isis digital-wallet initiative that also includes Chase and Capital One.
Negative factors working against credit card industry profitability include continued and increased scrutiny from the Consumer Financial Protection Bureau, which in January announced an enforcement action against Discover on its fee-based products.
Amex in February also signaled that it expects the bureau to take action against the way it assesses late fees on charge cards, Moody's said.
"The developments highlight the heightened level of regulatory scrutiny toward the consumer finance industry in general and the credit card space in particular," Moody's said.
The report includes a "worse-than-expected" scenario in which a second U.S. recession develops during the second quarter of this year and continues through the end of the year. Such a scenario would weaken spending and hurt profitability, but it would not likely result in a spike in the charge-off rate.
The average credit card industry charge-off rate peaked in March 2010 at 11.21%, and since then it has been on a steady march downward as issuers have eliminated troubled loans from portfolios.
The average charge-off rate on outstanding balances fell a single basis point in February, to 4.97% from 4.98% in January, reaching its lowest level in more than four years, Moody's recently reported.
"This is a business that is very sensitive to the economy, so any forecast depends on a lot of variables that could change," Beaudouin cautions.