Economist.com
That depressing scenario looks plausible given the unexpectedly weak second-quarter profits from American Express, America’s fourth-largest card issuer and the one most geared towards well-heeled consumers. June was particularly ugly: “roll rates”—the number of customers falling from current to 30 days delinquent, or from 30 to 60 days—jumped sharply. Amex’s charge-offs of debt deemed unrecoverable have climbed in a few months from unusually low levels to well above the historic average of 4.8% of balances outstanding. It has scrapped its earnings forecast. Amex’s problems stem in part from a familiar source: an aggressive move out of its traditional business of charge cards, which must be paid off each month, into riskier credit cards that allow customers to carry a balance. As the credit boom reached its peak, the firm’s credit-card business was growing by a dizzying 20% or more a year, with younger consumers with scant track records among the targets. “Outsized growth came at a price in terms of credit quality,” says Richard Hofmann of CreditSights, a research firm.
But broader forces are at work. With property prices tumbling, unemployment rising and consumer confidence at a 16-year low, even “longer term, superprime card members” are feeling the pinch, Kenneth Chenault, Amex’s boss, told analysts this week. They are spending less on discretionary items, and many are struggling to keep their balances down—even, ominously, if they have gleaming credit scores. If this trend worsens, losses could mount at an accelerating rate. That is because customers with better credit scores get disproportionately larger credit limits, points out David Robertson of the Nilson Report, which tracks the industry. A risky customer might be given $2,000, a slightly sounder one ten times that. Big losses would be particularly painful for big banks, which have come to rely heavily on card revenue to offset capital-markets losses. Some 79% of Citigroup’s profit last year came from cards. More
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