Credit-Card Losses Flash Warning

>Average net charge-off rate for large U.S. card issuers increased to 3.29% in the second quarter, its highest level in four years.

Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy.

The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers, including J.P. Morgan Chase & Co., Citigroup Inc., C +1.68% Capital One Financial Corp. COF -0.23% and Discover Financial Services , DFS -0.56% had increases for the quarter.

The trend, which accelerated in the first half of this year, has started to suppress bank earnings. If consumers’ budgets get more stretched, a pullback in spending could pressure both growth and corporate profits.

While losses are rising, they remain low compared with historical levels and the 10% net charge-off rate they hit in early 2010. Lenders say they aren’t expecting a return to crisis-level losses and the increases are largely a return to normal after a period of abnormal lows.

Still, other bankers have noted the change in direction, a new string of losses in the industry after 24 quarters in which they fell. “The overall environment is deteriorating,” said David Nelms, chief executive at Discover in an interview. It is “not quite as favorable as it was over the past few years.”

In 2010, when credit card write-offs started declining, banks lent mostly to creditworthy borrowers. But starting around 2014 many lenders loosened underwriting standards substantially, turning to subprime borrowers with lower credit scores that brought in higher yields.

That contributed to a new boom in credit-card spending. Card balances nationwide rose 6% over the last 12 months through May, a growth rate that is up from about 1% four years ago, according to the Federal Reserve.

Rising balances, however, have also coincided with the recent loan losses and, analysts note, put a dent in what has been one of the healthiest credit-card markets on record.

The missed payments and increase in losses are having knock-on effects on lenders’ earnings. Many posted double-digit percent year-over-year increases in the money they set aside to cover future card losses.

The card market is an indicator of consumers’ ability to pay back their debts. Unlike mortgages, a much broader group of consumers have access to cards. And these accounts can fall low on the priority list of bill payments when household finances get tight.

Credit cards also moved to the top of the list of concerns about potential losses in the Fed’s annual stress test of banks in June. It said banks would incur $100 billion in projected credit-card losses in a severely adverse hypothetical recession, tied with commercial and industrial loans. Cards ranked third the year prior.

“We’ve seen an inflection point in credit,” said Charles Peabody, managing director at Compass Point Research & Trading LLC. “It is going to get worse from here.”

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