High-end credit cards
Posted on January 15, 2008
Filed Under Credit Card News | Comments Off
The luster on all those silver, gold and platinum credit cards is getting tarnished.
For the past few years, banks that issue credit cards have aggressively wooed affluent customers with lavish perks and fat credit lines. Now, that high-end strategy is coming back to bite the banks: There are growing signs that some of those consumers are having a hard time paying their bills.
It is the latest in a series of woes for U.S. financial institutions, which are struggling to contain a series of credit-related problems after years of strong profits. Banks have lost billions of dollars from soured home loans and mortgage-related investments. And defaults on commercial loans could rise later this year if the economy weakens further. Investors and analysts will get an in-depth look at the credit-card problem this week when Citigroup Inc. and J.P. Morgan Chase & Co. – two of the biggest U.S. issuers of plastic – report fourth-quarter results. Both are expected to set aside hundreds of millions of dollars to cover mounting losses on credit cards and other consumer loans.
Bank profits have been pumped up in recent years by historically low levels in credit-card delinquencies and write-offs. Those levels had widely been expected to rise with the economic slowdown. The concerns intensified Thursday, when American Express Co. said it had experienced a sudden rise in delinquencies in December.
The AmEx development was viewed as even worse news for the industry because AmEx is well-regarded widely for its creditworthy customer base and sophisticated risk-management capabilities.
A slowdown in overall credit-card growth during the past few years sent banks chasing high-end customers. The upscale cards – which offer amenities such as concierge services and access to popular events – pump up profits in good times because they carry higher fees for customers as well as merchants who pay banks a percentage on each transaction.
In recent months, banks have scaled back some of their promotional offers on less-attractive customers. At the same time, they are flooding their best clients with offers for higher credit lines and lower interest rates.
Still, the rising delinquencies and charge-offs are likely to crimp bank profits at a time when they are under pressure. Card losses at Bank of America are expected to rise to 6 percent in 2008 from 4.9 percent in the third quarter, representing more than $500 million in incremental losses.
The banks could find themselves under more pressure in their credit-card businesses later this year, especially if unemployment rises. The Labor Department said this month that the December unemployment rate jumped to 5 percent from 4.7 percent.
“The higher the unemployment rate goes, the more areas of potential loan losses come to the banks,” said John Augustine, chief investment strategist in Fifth Third Bancorp’s private bank.
by Robin Sidel and David Enrich