Credit cards give investors jitters, but bankers sleep fine

For Kevin St. Pierre, the math on credit cards is pretty simple.

“Generally, if the consumer has income, they pay their debts,” St. Pierre, an analyst at Sanford C. Bernstein, said in a note to clients last week. “Consumer credit losses are driven predominantly by unemployment.”

With investors skittish over the potential for higher defaults on auto and student loans, St. Pierre is one of many industry analysts and banking executives who’ve sought to allay similar concerns over rising credit-card write-offs.

Card balances eclipsed $1 trillion in February, the most since the 2008 financial crisis, Federal Reserve data show. Card issuers including Capital One Financial Corp., Citigroup Inc., Synchrony Financial and Discover Financial Services all reported higher card write-offs in the first quarter.

Still, executives and analysts see one data point as key to the health of the credit-card industry: jobs. U.S. unemployment is near an all-time low, and as long as it stays there, consumers should be able to handle their card debt.

“We’re not losing any sleep that we can’t manage the credit situation we’re confronted with right now,” Discover Chief Financial Officer Mark Graf told analysts in April. “While charge-off rates have risen, they remain quite low by historical standards.”

Six of the biggest U.S. card lenders – JPMorgan Chase, Bank of America, Citigroup, American Express, Capital One and Discover – reported that loans at least 30 days overdue, a harbinger of future write-offs, fell in April. Synchrony, signaling confidence in its own prospects, announced a dividend increase and new $1.6 billion stock repurchase program last week. Shares of the private-label card issuer have tumbled 26 percent this year, the worst performance in the S&P 500 Financials Index.

Total U.S. credit-card loans have climbed every year since 2008, when the jobless rate approached 10 percent, forcing issuers to write off more than $100 billion in loans over the next two years. Recently, much of the growth has come from banks extending credit to borrowers with lower credit scores, causing write-offs to revert toward historical norms.

“You’re now introducing a broader set of individuals to your portfolio that are likely more adverse,” said Sanjay Sakhrani, a KBW analyst. “That’s just the nature of growth. These are still profitable customers. But that growth has come back and it’s creating a more normal-looking complexion in the portfolio.”

For others, including Wells Fargo & Co. analyst Jason Harbes, looser underwriting standards is cause for worry. He downgraded the credit-card sector, noting in a May 19 report for clients that “credit quality has visibly worsened over the past two quarters.”

The recent increase in defaults is reminiscent of the mid-1990s, when write-offs and loan balances rose despite a sustained decline in the unemployment rate, Harbes said.

In addition to jobs numbers, analysts track the percentage of household income that consumers spend on debt. That figure dropped to 9.98 percent in 2016, the lowest since 2012, Fed data show.

“We watch a lot of different things and are always worried that there will be some sort of inflection point,” said Chris Donat, an analyst at Sandler O’Neill & Partners. “But we don’t think we’ve seen an inflection point here in credit quality.”