How the major credit card companies are doing during the coronavirus
All banks brace for heavy loan losses due to economic shutdown caused by Coronavirus pandemic. But one type of loan category that always comes with a higher rate of loss – even under normal economic conditions – is credit card debt. For example, national credit card write-offs (debts unlikely to be collected) in 2019 were 3.7%. It might seem like a small number, but it’s huge considering that most banks reported charge rates well below 1% until recently.
Even the biggest bank in the country, JPMorgan Chase (NYSE: JPM), only had a net write-offs to total loans ratio of 0.60% at the end of 2019, and the banking giant has its own credit card division. Because credit card write-offs and delinquency rate often worsen during a recession or economic downturn, let’s see how some of the biggest credit card companies in terms of the importance of credit card debt to their overall health are weathering these difficult times. Credit card loans to A capital letter (NYSE: COF), American Express (NYSE: AXP) and Discover (NYSE: DFS) represent 30%, 39% and 65% of each company’s total assets, respectively, making cards a key part of their success.
Prepare for losses
American Express was the only one of those companies to report positive first quarter profit, and that profit was down 76% from the first quarter of 2019. Discover reported a net loss of $ 61 million in first quarter, while Capital One suffered a net loss of $ 1.3 billion. Profits derailed after all three companies significantly increased the amount of cash set aside to cover potential future losses, also known as a credit allowance.
|T1 credit provision (billions)||Increase (quarter linked)||Total assets (billions)|
|A capital letter||$ 5.4||198%||$ 397|
|American Express||$ 2.6||156%||$ 186|
|Discover||$ 1.8||116%||$ 113|
There are some interesting points to remember from the provisions. American Express has probably performed better because less of its overall portfolio is made up of credit cards. More than half of its total revenue comes from rebates – the fees charged to merchants when card members use their American Express card to purchase goods and services. Now discount revenue is down significantly in the quarter, but you don’t need to book accordingly.
Another interesting finding is that the percentage increase in the credit supply of these companies was not as high as some of the larger and more traditional banks like Bank of America (NYSE: BAC), which increased its provision by more than 400% from the related quarter.
This could be because credit card companies have already set aside larger total reserves. But you would think that companies like Capital One and Discover, with large credit card loan portfolios, could see higher percentage increases in their credit supply, given the nature of their business.
Another big problem that hurts these companies is the decrease in overall expenses. A credit card is a type of revolving debt, so unlike an installment loan, borrowers are not given a sum of money before they spend it. Rather, they spend or borrow the money first and pay it back later. Less spending effectively means less borrowing, as well as less interest payments and transaction costs.
Recently, the US Department of Commerce said consumer spending fell 7.5% in March and a similar trend was emerging in April. American Express revealed in its presentation to investors that owner billing – spending on company-issued American Express cards – is down about 45% on an annualized basis in April, although it shows signs of stabilizing. . The company was particularly hard hit in travel and entertainment (T&E).
To discover is to see the same thing unfold. Fifty-one percent of the company’s 2019 sales were in travel (8%), restaurants (8%) and retail (35%). Between April 1 and April 19, the company’s volume on an annualized basis declined 99% in travel, 60% in restaurants and 11% in retail.
Capital and liquidity
With heavy losses expected in the second quarter and the rest of the year still uncertain, all three companies were careful to stress that they entered the pandemic with strong capital positions. Capital One said it had $ 106 billion in total cash reserves from Federal Home Loan Bank (FHLB) cash, securities and capacity at the end of the first quarter. American Express said its cash and investment balance reached $ 41 billion at the end of the first quarter, while Discover said it had $ 19 billion in liquid assets and large capacity. loan.
All three companies also plan to cut spending to further boost liquidity. American Express CEO Stephen Squeri said the company would look to cut the company’s discretionary spending by nearly $ 3 billion and then redirect some of those funds to new product benefits and investments. longer term. Discover CEO Roger Hochschild said the company plans to implement around $ 400 million in cost reductions over the last three quarters of 2020. And Capital One CEO Richard Fairbank said the company was forgoing some marketing initiatives, tightening hiring and carefully managing operating expenses. .
Better positioned than in 2008
Capital One, American Express and Discover also said they were feeling much better about overall credit quality than they were before the Great Recession of 2008. Fairbank said that in general, the American consumer is in better shape. much better shape because consumer debt levels are on a per capita basis, while lower interest rates make it easier to pay down debt and people are saving more than before. Hochschild said that while 26% of Discover’s credit card portfolio at the end of 2007 had a FICO score below 660, that number was only 19% at the end of 2019. Meanwhile, the CFO of American Express, Jeffrey Campbell, said 88% of American consumers and small business customers who have signed up for the company’s pandemic relief program are premier and super-prime cardholders.
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