How Credit Card Issuers Are Prepping for the Next Downturn

How Credit Card Issuers Are Prepping for the Next Downturn

Wack, Kevin, American Banker

Byline: Kevin Wack

A slump in U.S. consumer credit is inevitable, and the key question is when it will arrive.

Is the next turn in the credit cycle right around the corner? Or is it still years away?

The answer has big ramifications for the $1 trillion credit card industry, which has enjoyed unusually strong profits in the post-crisis period, but typically suffers during recessions.

At an industry conference in New York, credit card industry executives said Thursday that they still see sunshine on the horizon. But they were also careful to make clear that they are taking steps to prepare for rainy days ahead.

American Express Chief Executive Stephen Squeri argued that the New York-based company is much better positioned to come through a downturn than it was on the eve of the financial crisis.

Substantially more of Amex's customers had low credit scores in 2007 compared with today, he said, adding that the same is true for customers who have been with American Express for less than two years. That cohort tends to default more frequently than longer tenured customers.

Amex, which has historically focused on wealthy consumers, typically has the lowest loss rates of the large U.S. credit card issuers. Its net write-off rate on loans to U.S. cardholders was 2.4% in the first quarter, up from 2% in the same period last year.

"I guess for the naysayers it's going to be, 'Well, let's see how you go through the cycle,'" Squeri said. "My belief is that we will go through that cycle a lot better than we did back in 2007."

Across the U.S. banking industry, the charge-off rate on credit card loans spiked from 3.73% in the second quarter of 2007 to 10.54% in the fourth quarter of 2009, according to Federal Reserve data.

Following the Great Recession, the industrywide charge-off rate fell below 3%. It has since inched back to 3.65%.

In recent years, U.S. consumer debt has been growing at a faster rate than wages, which suggests that many households are accumulating a tab they will be unable to repay. The consumer credit market has so far been buoyed by the low unemployment rate, which fell to 3.9% in April.

"Although consumers' financial health is generally strong, there is a risk that they will take on too much credit in the present environment," analysts at Moody's Investors Service wrote in a recent research note.

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