A Buoyant Economy Brings Mixed Blessings to Card Issuers

Harry Truman once pleaded with his staff to bring him a "one-armed economist" who would not make economic forecasts by saying, "Well, on the one hand . . . but on the other hand." The current buoyant economy has not been as helpful to the bank credit card business as one might expect. On the one hand, the boom has been good for bank credit cards, but on the other hand . . . .

Data from more than $300 billion of securities backed by bank credit card receivables that are rated and monitored by Moody's Investors Services reveal countervailing trends in the profitability of bank credit cards. On the one hand, the current economic boom has reduced delinquencies and charge-offs on bank credit card portfolios. The delinquency rate declined in April 2000 to 4.46 percent from 4.67 percent in April 1999. (The delinquency rate is defined as the proportion of U.S. credit card balances in which a monthly payment was more than 30 days past due.) Consistent with this trend, the annualized chargeoff rate fell to 5.53 percent in April 2000 from 5.76 percent a year earlier.

On the other hand, a strong economy meant that consumers were more able to repay their accounts in full each month and avoid the imposition of finance charges and late fees. The payment rate in the first quarter of this year averaged 15.23 percent, up from 14.94 percent in the first quarter of 1999 and exceeding the previous record high of 15.21 percent in the third quarter of 1999.

An important measure of the profitability of a credit card portfolio is the "excess spread," the difference between the yield on the portfolio and the funding cost. Was the lower yield from consumers' payments offset by a lower cost of borrowing by the card-issuing banks? No. Moody's reports that the three-month average excess spread in the securitized pools declined to 5.66 percent in April 2000 from 6.39 percent a year earlier. This was the fifth consecutive month in which the year-to-year comparisons were unfavorable. The "pinch" on the spread stems from a decline in average yield to 18.5 percent in April of this year from more than 20 percent in March 1999. At the same time funding costs rose to 5.9 percent in April 2000, up from 5.3 percent a year earlier.

Moody's attributes the decline in the average yield to competition. To offset the decline in their excess spread, card issuers are already increasing their rates on new offers of cards, and some industry analysts suggest that banks may reintroduce annual fees. The danger, of course, is that imposition of annual fees will drive away more cardholders and their revenues than the remaining cardholders will provide in annual fees.