Wall Street investors see positive signs in the credit card industry as a sign of improvement in the overall economy, according to numerous news wire reports this week. Shares of many major lenders, including Capital One and American Express, rose on the news of improved default rates among credit card customers in June.
By tracking two critical risk factors, industry analysts can review the overall financial health of a lender's customer base:
- Delinquencies indicate the number of credit card customers who have fallen behind on their minimum monthly payments by thirty days or longer.
- Charge-offs indicate the number of customers who have abandoned their accounts entirely, missing five or more consecutive payments.
In a statement to investors, American Express touted the first quarterly net decline in charged-off credit card accounts in nearly a year. Once final figures from June have been compiled, analysts believe that American Express cardmembers will once again fall below the ten percent charge-off rate that many other card issuers have witnessed. Company officials also remarked that the latest figures suggest stronger results for the next two quarters than previously forecasted. Financial stock watchers called attention to the performance of private label credit card issuer Alliance Data, which also posted a quarterly drop in charge-offs.
Big Banks Beat Street Estimates on Credit Card Delinquency Rates
Bank of America and Capital One both reported a rise in net charge-offs during June. However, the leading banks' exposure to high risk accounts was mitigated by lower-than expected delinquency rates, suggesting to some analysts that Americans are emerging from the worst of the economic downturn. Discover Card also boasted a lower overall charge-off rate to offset a slight rise in delinquencies. Not every Wall Street analyst touted this week's positive results, however. Some pundits noted that credit card delinquency and charge-off rates often decline in the spring when Americans use tax rebate checks to pay down their account balances.
Nevertheless, investors flocked to the financial sector this week, causing some bank stocks to gain as much as twelve percent in value. Reduced charge-offs hint that banks have effectively met regulators' challenges to shore up their portfolios by lending to more stable consumers. Since many economists see a strong correlation between credit card default rates and unemployment patterns, improved forecasts could also signal a more positive outlook for the employment rate. Both trends point to a more positive future for credit card lenders, especially if newly confident customers continue to maintain more profitable accounts under next year's more stringent banking regulations.