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Credit card charge-off rate drops, 'tailwind' expected to continue

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Credit card charge-off rate drops, 'tailwind' expected to continue

Net charge-offs and delinquencies for major credit card issuers declined both sequentially and on a year-over-year basis in March, and the improving economic backdrop has buoyed the expectations of banking executives.

The group average charge-off rate declined to 1.95% in March, down 5 basis points from February and 59 basis points from the year-ago period, for JPMorgan Chase & Co., Bank of America Corp., American Express Co., Citigroup Inc., Capital One Financial Corp. and Discover Financial Services. The average credit card delinquency rate declined to 1.08% in March from 1.18% in February and down by 42 basis points from 1.50% in March 2020.

The average trust portfolio loan gross yield for the six large card issuers recovered to 21.93%, up from 20.44% in February and 19.67% in the year-ago period.

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Credit card delinquencies for most credit card issuers declined for the third consecutive month this year. Lenders attributed the decline to reopening of the economy, government's stimulus programs and improved financial health of the consumers.

"So the good news is that consumers are healthy from every aspect. We have no deferrals left except in the mortgage business," said Bank of America's Chairman, CEO and President Brian Moynihan during the first-quarter earnings call.

In addition to the government's stimulus, factors such as improved employment scenario, increased household savings and industry forbearance programs led to customers paying down debt.

Roger Hochschild, CEO, president and director of Discover Financial Services, expects payment rates to remain elevated for the year as households use savings to meet debt obligations and "continue to benefit from payment relief programs, such as federal student loan and mortgage payment forbearance," he said during an earnings conference call.

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Lenders have now pushed their expectations for a rise in card losses to the end of this year or 2022. Discover Financial Services' Executive Vice President and CFO John Greene anticipates credit losses to likely be flat to down this year with the possibility of "some increase in 2022."

Citigroup's CFO Mark Mason made a similar comment during his company's earnings call. "Given the delinquency trends we're seeing today, we do not expect credit deterioration in the U.S. portfolio in 2021," Mason said. "And so peak losses may not occur until late 2022, depending on whether or not the stimulus results in a permanent benefit."

JPMorgan expects card net charge-off rate to be around 250 basis points for the year. "Pre-COVID, we would have thought that our loss rate in card this year would have been 3.3%, 3.5%. So it just gives you a sense there of that tailwind on credit is significant," JPMorgan CFO Jennifer Piepszak said during a conference call.

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In terms of banks' overall credit, Fitch Ratings, in a April 21 report, said that bank credit quality has outperformed early pandemic expectations primarily driven by the significant boost to personal income levels. However, banks' core profitability is likely to remain under pressure during rest of the year, as loan growth, GDP and employment remain below pre-pandemic levels.

Click here for data on credit card master trust yields, net charge-offs and delinquencies in Excel format.