Rays of Light Shining on the Credit Card Sector

It is hard to fathom that there may be reasons to feel optimistic about the credit card sector, particularly given that charge-off placement volumes are down nearly 50 percent in 2011 vs 2010 (see chart at right), and the delinquency/charge-off rates seem to be in a permanent free fall. But there are distinct market trends unfolding that give validity to the notion that the credit card sector is finally bottoming out, and is poised for growth in the future:

• Total Outstanding Credit Card Debt Increased in Q2 2011 – OK, so it was only a one percent increase (roughly $8 billion). But what’s important is that this increase occurred in the second quarter, not the fourth which is when the only increases have occurred over the past four consecutive years as a result of holiday shopping. This is certainly a sign that consumers are more comfortable spending money and accumulating debt despite the ongoing economic and unemployment concerns.

• Banks Started to Ease Lending Standards in 2011 – According to a June 2011 article published by Moody’s Analytics, new bankcard originations in Q1 of this year were 20 percent greater than in Q1 2010. What’s more intriguing is that over 90 percent of the account growth was driven by consumers with less than 700 FICO scores – confirming that banks are starting to lend more to consumers with lower credit scores. While the transaction volumes are low compared to the pre-recession years, these increases in originations are welcomed indicators of future economic improvement as consumers will have greater access to credit. They are also potential predictors of delinquency and charge-off volume stabilization.

• Bank Charge-Off Rates Stabilized in August – Five of the largest credit card issuers experienced a slight increase in their charge-off rates on average in August, the first time this has occurred since last August. Maybe there is something unique about the month of August, or perhaps this is a sign of better things to come.

While it remains unclear exactly when delinquency and charge-off volumes will stabilize, current market trends seem to indicate that this process may have already begun. We can only hope that banks will continue to lend to consumers, who will continue to spend and eventually enable the U.S. economy to get back on track. I believe we are seeing the early signs of this progress and look forward to watching it unfold throughout the rest of this year.

Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.