Household's Annual Report

The annual report of Household International Inc. reveals some interesting trends in the industry as well as the policies of one of the major "players." As shown in the table below, from years-end 1996 to 2001, Household "lowered its risk profile" by shifting out of credit cards and into real estate loans. The portion of its managed portfolio committed to credit cards was cut almost in half, from 33 percent to 17 percent. Over the same period the portion of its managed portfolio invested in loans secured by real estate rose by almost two-thirds.

While moving away from credit cards, Household explored new, and presumably less risky, relationships. For example, it signed an agreement with GM Goodwrench and Saturn dealers to finance consumers' purchases of auto parts and services. HFC also expanded its on-line application and underwriting system to 4,600 auto dealers. While moving out of credit cards, the firm expanded its penetration of the UK market to 64 Beneficial offices and 155 HFC offices.

In spite of shifts designed to lower the risk of its portfolio, the onset of the recession during 2001 increased the delinquency rate in each segment of HFC's portfolio, as shown in the table below.

Source: Household International, Inc., 2001 Annual Report

Note that serious delinquencies rose in every segment of the business from the end of 2000 to the end of 2001. The previous table showed that HFC significantly reduced the share of its assets invested in MasterCard/Visa, with a delinquency rate of 5.67 percent. In contrast, it greatly increased its commitment to real estate loans, which had a delinquency rate of only 2.63 percent. Perhaps the only anomaly is the continued commitment of just under a fifth of the portfolio to personal non-credit card with a delinquency rate of 9.04 percent in the fourth quarter of 2001. Quite possibly, these loans represent the firm's very large business in tax-refund lending. Hence, the serious delinquencies may not precede serious credit losses.

Finally, it is apparent from the table below that Household obtained almost two-thirds of its net income from consumer loans in the U.S., with just under a tenth from its international operations. Note also the high provision for credit losses on the credit-card segment.

Source: Household International, Inc., 2002 Annual Report