Witkowski’s Take: Two Off-Key Notes in Banks’ Earnings

News
August 24, 2017

U.S. banks are seeing more credit-card debt and auto loans go sour, a potentially worrying point for regulators in an otherwise upbeat picture of banks’ financial performance.

When the Federal Deposit Insurance Corp. released its report on banks’ second-quarter earnings this week, the data showed fewer loans being charged off for all loan types, except two: credit cards and auto loans.

FDIC Chairman Martin Gruenberg said the slight increase in charge-offs for those two loan types “thus far is not dramatic” but “it was different from the general trend of the industry so it’s something we’re paying attention to.”

Banks charge off loans after the borrower stops making payments for a certain period. Charging off often results in a black mark on the borrower’s credit report, and means the bank has given up on collecting the debt itself. Many charged-off loans are sold to debt collectors.

The credit-card market can be an important indicator of economic trends because more consumers have credit cards than bigger loans, such as mortgages. And consumers with financial problems will often stop paying a credit card or auto loan before defaulting on a mortgage.

Banks reported $7.17 billion in net charge-offs for credit cards for the second quarter, the highest amount since the fourth quarter of 2011 and a 25% jump from a year earlier, according to the FDIC.

The rate of credit-card debt charged off to outstanding balances, averaging 3.74% in the second quarter, was up slightly from a year earlier but consistent with the 3% to 4% range seen quarterly since 2012. The current charge-offs remain well below the postcrisis period: Banks were charging off as much as 13% of credit-card balances in early 2010.

“We’re very confident with where we are on our charge-offs after recovering from the 2008 financial collapse,” said Richard Hunt, president and CEO of the Consumer Bankers Association.

However, charge-offs are starting to affect the earnings of some of the largest credit-card issuers, which are moving money into reserve to cover expected credit losses, as previously reported by The Wall Street Journal. Some of the largest credit-card issuers—including J.P. Morgan Chase & Co., Citigroup Inc., Capital One Financial Corp. and Discover Financial Services—reported higher charge-offs for the second quarter. The major card issuers are typically the first to feel credit deterioration as they hold larger card balances than other banks.

Auto loans also contributed to the increase in charge-offs during the quarter, though not as much as credit cards, given that regulators have been warning banks to tighten up underwriting, particularly in the subprime auto market.

Banks recorded $770 million in net charged-off auto loans during the quarter, up 41% from a year earlier but down from more than $900 million in charge-offs booked in each of the prior two quarters.

The Office of the Comptroller of the Currency recently called the uptick in auto-loan delinquencies a “lagging indicator” of banks having loosened underwriting standards in recent years to boost loan growth. The national bank regulator noted “renewed emphasis” on monitoring how banks collect and cover for auto-loan losses.