Money Matters - Simplified

Credit Cards: Still No Sign of Recovery

Moody's released an industrywide report on credit card quality earlier
this week, and there's really only one takeaway from it: There's no
recovery in the credit card industry.

First, let's take a step back. Last week, most major card providers released August default rates:


August Default Rate

July Default Rate

JPMorgan Chase (NYSE: JPM)



American Express (NYSE: AXP)



Discover Financial (NYSE: DFS)



Capital One (NYSE: COF)



Citigroup (NYSE: C)



Bank of America (NYSE: BAC)



An ugly showing, for the most part. This was to be expected, though.
Banks usually charge off debt between 90 and 180 days after it's become
delinquent, so current increases in default rates represent borrowers
who started falling behind earlier this year, when unemployment was
growing at a horrendously fast clip and GDP was falling off a cliff.
That lag between the time borrowers start falling behind and the time
banks acknowledge losses is the reason default rates can increase after
the economy, particularly unemployment, starts to recover. And it's no
doubt why shares of these companies have surged even while default
rates keep blowing up.

What's troubling about the Moody's report is it shows an increase in
early-stage delinquencies, or borrowers who are just now starting to
fall behind. For the industry as a whole, borrowers more than 30 days
but less than 60 days delinquent increased from 1.41% to 1.65%.

What this means is that the deterioration in banks' default rates
will undoubtedly continue for many, many more months. As long as
early-stage delinquencies are rising, the default rates won’t recover,
and banks will have to cover ever-widening holes in their balance


© 2009 UCLICK, L.L.C.