NEW YORK--(BUSINESS WIRE)--U.S. credit card asset quality will deteriorate in 2016 due to financial institutions loosening underwriting standards and accelerating loan growth, according to the latest semi-annual credit card asset quality report from Fitch Ratings. Profitability for credit card lenders will also be challenged by further increases in reward costs and loss provisioning stemming from the loan growth and portfolio seasoning, although ratings remain supported by strong franchises and increased capital and liquidity positions.
"Credit card asset quality has been relatively stable and near all-time lows for the past few years; however, we expect to see financial institutions focused on credit card lending to experience some deterioration at this point in the credit cycle," said Michael Taiano, Director, Fitch Ratings.
On average, credit card portfolios at the universal banks (Bank of America, Citi and JP Morgan), grew modestly in the first quarter of 2016 (1Q16), after several years of portfolio contraction. While profitability for card issuers has been on the decline since 2013, the segment's returns are fairly robust relative to other bank lending products. Capital One Financial Corporation's portfolio growth far outpaced the pack, while Discover Financial Services' growth has been more consistent. Conversely, American Express's portfolio tumbled 16.6% from the removal of its Costco and JetBlue receivables, although absent the loss of these two co-brands, the portfolio grew at a double-digit rate.
American Express continues to maintain the best credit performance for general purpose cards, averaging a 1.46% net charge-off rate over the past nine quarters. U.S. Bancorp had the highest average loss rate for the past nine quarters and Capital One Financial posted the highest loss rate for 1Q16 at 4.16%, due to its above average subprime exposure and the seasoning effects from its recent loan growth.
"Loosening underwriting standards from increased competition likely contributed to the industry's portfolio growth in 1Q16, and we expect card issuers to moderately loosen standards to sustain the recent growth trend," added Taiano.
For retail (private label) cards, Alliance Data Systems continued to lead the peer group in portfolio growth, even as growth moderated for the quarter. Synchrony Financials' portfolio growth continued to accelerate, while Citi's retail card portfolio growth slowed, growing just 0.23% year over year.
While 30+ day delinquencies dipped one basis point to 1.82% (on a weighted-average basis) for the largest general purpose card issuers over the prior year, Fitch expects delinquencies to trend higher in 2016, which should be a primary driver of higher loss provisioning levels for the card issuers.
Purchase volume growth has been fairly steady for both general purpose and retail card issuers. Fitch expects purchase volumes will continue to outpace growth in consumer spending, due to more robust reward programs and the secular shift toward cards from cash and checks.
Fitch's 2016 outlook for finance and leasing companies is negative due to expectations for normalized credit performance, increased compliance costs and a more intense competitive environment.
"An interest rate increase would likely boost credit card segment profitability and contribute to strong capital and liquidity levels, provided consumers can absorb increased debt service costs," said Taiano.
Additional information is available at 'www.fitchratings.com'.
U.S. Credit Cards: Asset Quality Review 1Q16
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881686
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