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JPMorgan, Citigroup Expect More Credit-Card Users to Default

Bloomberg logoBloomberg 10/12/2017 Hugh Son, Dakin Campbell and Jenny Surane
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Banks have enjoyed years of declining losses from fewer consumers defaulting on debts. They appear to be preparing for a turn.

Shares of JPMorgan Chase & Co. and Citigroup Inc. fell after the banks boosted their reserves for consumer-loan losses by the most in more than four years. Both lenders set aside money in the third quarter because they expected write-offs for credit-card lending to climb in periods ahead, with Citigroup saying the increase is coming faster than it had anticipated.

“We’re at an inflection point in credit,” Charles Peabody, a banking analyst at Compass Point Research & Trading, said in an interview with Bloomberg Television. “You’re seeing in this quarter very aggressive reserve additions in the card portfolio for future losses, so the industry knows it’s coming.”

The lenders’ stock dropped after the “notably disappointing” trends in their credit-card units, Henry Coffey, an analyst at Wedbush Securities Inc., said in a note to clients. Citigroup fell 3.4 percent in New York, the most since May 17, while JPMorgan slipped 0.9 percent. Synchrony Financial, which partners with retailers including Amazon.com Inc. and Wal-Mart Stores Inc. to issue cards, declined 2.5 percent.

Thursday marked the opening of the U.S. banking industry’s earnings season. The initial reports from JPMorgan and Citigroup signaled a shift in consumer credit quality, while also confirming a widely expected slump in revenue from trading and subdued loan growth.

Related video: Credit cards still most profitable business for banks, says Barclays analyst (provided by CNBC)

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In the years after the financial crisis, an improving U.S. economy with lower unemployment and less household debt allowed banks to claim back billions of dollars they had previously set aside for bad loans.

But by last year, working-class Americans were devoting a growing percentage of their income to paying debts, the first increase since 2010 and a shift that’s likely contributing to rising default rates, Moody’s Investors Service said this week.

So far, there are few signs of a dramatic reversal at big banks. JPMorgan’s non-performing consumer loans fell again in the quarter, and only 0.34 percent of the loans in Citigroup’s retail bank were more than 90 days delinquent, lower than a year earlier.

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JPMorgan said its increase in reserves against credit-card lending was caused by a move it made in the last few years to give loans to riskier borrowers as a way to boost revenue.

The increase is “not about deterioration or normalization of credit, but is about being paid for the risk we’re taking and being able to reach a little deeper into the credit spectrum,” JPMorgan Chief Financial Officer Marianne Lake said in a call with reporters.

Citigroup’s current delinquency rate of 2.84 percent in its North American branded credit-cards business will probably increase to 2.95 percent in 2018, CFO John Gerspach said on a call with reporters. It will ultimately rise to between 3 percent and 3.25 percent by 2020, which would be in line with historic norms, he said.

Citigroup pointed to one trend: When people who hold cards issued in partnership with retailers fall behind, the lending relationship has a “higher propensity” to deteriorate so quickly that Citigroup has to write off their debts, Gerspach said.

The bank is still comfortable with the card business, but it’s important to be vigilant, he said.

“The last thing you want to do in any sort of consumer-credit business is take your eye off the ball or get complacent, and so we’re not getting complacent,” he said. “But as we look at all the statistics we see, we continue to think our branded-card clients remain very healthy.”


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