Credit card companies report higher lending levels

Three of the largest US credit card issuers have reported higher levels of lending – prompting analysts to suggest the industry has finally reached a turning point, after the damaging effects of the financial crisis.

American Express, Capital One and Discover Financial Services all recorded faster loan growth in their domestic card businesses in May, according to filings posted this week – adding to data showing stronger demand for revolving consumer credit in April.

Analysts have been looking for green shoots in the US credit card business ever since banks tightened their lending requirements, in response to the bad debts incurred in the wake of the financial crisis. Consumption has been sluggish in the wake of the recession as households sought to repair their balance sheets. But analysts suggest the revival of credit card debt is another sign that the process is nearing an end – boosting the chances of faster economic growth this year.

“I’m pretty convinced we’ve hit this inflection point,” said Donald Fandetti, an analyst at Citigroup. “All of a sudden, consumers feel a little bit better, on top of that – from what we hear anecdotally – we think the banks are increasing credit lines for cardholders.” He now expects loan growth to be somewhere between a little more than zero and 4 per cent.

Capital One achieved its first positive loan growth in almost a year in May, with a year-on-year increase of 0.15 per cent. But, stripping out the effect of running-off its HSBC credit portfolio acquisition and other purchases, its core loan growth was 1 per cent, Citigroup’s analysts said – the first acceleration since before the credit crisis.

At Amex, US card loans grew 6.1 per cent year on year, beating Barclays analysts’ estimates of 3.4 per cent and the previous month’s increase of 5.4 per cent. Meanwhile, at Discover, domestic card loan growth accelerated 6.3 per cent in May compared with 5.3 per cent the month earlier.

These increases comes after a strong increase in revolving consumer credit across the broader US economy. In April, the monthly increase in outstanding revolving credit reached 12.3 per cent on an annualised seasonally-adjusted basis, according to the Federal Reserve.

“While total consumer debt has been growing, there’s been almost no revolving, credit card loan growth ever since we bottomed, post-recession,” noted Mark DeVries, analyst at Barclays in New York.

However, card issuers have found that US consumers are becoming more comfortable with credit card debt, and instances of falling behind with payments – known as delinquencies – have slowed as cardholders skip fewer payments

May’s Master Trust data – which also captures the performance of US banks’ securitised credit card portfolios – showed that average delinquency ratios in May were at a ten-year low of 2 per cent.

Credit cards remain a profitable business for banks and card companies. Securitised portfolios of credit card debt currently yield around 18 per cent on average – which is historically low, but still rewarding for banks when their own borrowing costs are cheap.

“I don’t think anybody is so optimistic to think we’ll get back to double-digit growth like we had before the recession,” said Matthew Burnell, bank analyst at Wells Fargo Securities. “But, it looks like credit card balance growth is starting to become a bit more obvious.”

Additional reporting by Robin Harding