Credit cards, a lucrative business for banks
Last week, JPMorgan Chairman and CEO Jamie Dimon warned of growing recession risks and prepared investors for a likely “hurricane.” When consumer spending slumped during the pandemic, Citigroup hit a low point by ending 2020 with a 13% drop in quarterly revenue from Citi-branded U.S. cards from a year earlier.
In times of economic stability, cards are one of the most profitable businesses for banks, and analysts believe that a continued recovery in card borrowing would be a relief for banks. Today, overall credit card and similar loan balances at U.S. banks rose 15% as of May 25 from a year earlier, and are back to levels close to pre-Secondary levels. pandemic, according to data from the Federal Reserve. What’s even better for banks is that credit card holders are now allowing more of those balances to roll over and pay interest instead of paying them off monthly.
Although the amount of revolving balances is rarely disclosed by banks, it is essential because interest on revolving accounts earns far more than merchant transaction fees, some of which are shared with card networks, such as Visa and Mastercard. “The most profitable part of the credit card business is consumer revolving balances and their repayment over time,” said Barclays analyst Jason Goldberg.
At JPMorgan, revolving balances are up 8% from the low point, Marianne Lake, co-head of consumer bank Chase, said at an investor conference in May.
During pandemic lockdowns, consumers reduced their credit card spending and paid off balances like never before, thanks to stimulus payments and cash from refinancing mortgages.
The share of active card accounts with revolving balances has increased over the past two quarters to 52.6% after plunging to 51.3% during the pandemic. These balances generally prevailed at a level of around 60% for the seven years before COVID-19, after reaching as high as 70% during the 2008 financial crisis, according to data from the American Bankers Association.
Young people do not run away from credits
Banks say cardholders are paying off their debts a little slower today, resulting in higher interest-bearing balances. Discover Financial Services, for example, said payout rates were still significantly higher than before the pandemic, but had leveled off and even declined slightly in the first quarter. With the lifting of the blocking measures, the banks last year intensified the marketing of the cards and relaxed the credit criteria which they had tightened at the start of the pandemic.
Credit cards issued each quarter jumped 39% in the fourth quarter of 2021 from a year earlier, to 21.5 million, the highest figure on record and 14% more than before the pandemic, according to credit reporting agency TransUnion.
Chase, the largest card issuer in the United States, found evidence to quell the concerns of some investors who thought consumers had given up on credit cards, JPMorgan’s Lake said. “The younger generations, Mr. Lake said, contrary to popular myth, are not against credit or credit cards.” Millennials and Gen Z among Chase customers put 60% of their spending on credit cards. And they borrow more as they get older, she added.
Today, some investors worry that banks are getting too much of a good thing by promoting credit cards, as the risk of recession increases with the Federal Reserve’s policy tightening. Banks say they have learned from the financial crisis that knowing who to lend to and how much is more important to profits than trying to anticipate recessions.
Although card failure rates have increased over the past three quarters, they are still below pre-pandemic levels, according to TransUnion data. According to data from the Federal Reserve, delinquency rates for bad credit card loans at banks rose in the first quarter, from 1.57% to 1.82%. That’s half of what they were before the pandemic and low enough for the banks to make money.
For now, unemployment, a big driver of credit card losses, is low and wages are rising, Barclays’ Goldberg noted. “In the short term, it should be quite a profitable business. But banks need to be mindful of the next financial downturn.”