What’s in your wallet? Probably higher interest rates.

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FT Alphaville is reporting that the credit rating agency Fitch puts credit card losses at 10.4% of outstanding loans.  This is a record.  Bad news if you are a credit card company.  So, what does one do in that situation?  You raise rates on customers that are paying, silly.

Citi’s rate increases emerged on the day the government proposed legislation to create a new regulator with sweeping powers on consumer protection and a week after the bank was attacked by some politicians for raising employees’ salaries.

Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent – or nearly 3 percentage points – between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research.

Now, remember, insurance companies do the same thing- jack up rates for those that can pay to make up for the losses on those that can’t pay.  But, the optics here are not good – with Citi being bailed out by government and Obama calling for consumer protection at the same time as Citi is piling on interest.  It should be interesting to see if the Obama people have anything to say about this.

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The Alphaville post by Stacy-Marie Ishmael is interesting because it does suggest that off-balance sheet losses are going to be an issue here.

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I have two thoughts on the larger issue of credit cards.

  1. The banks to watch are Citi, JPM and BofA, and Capital One as they all have huge credit card outfits.  My eyes are on JPM because they are the bellwether of the industry now.  Back in November, I warned that they were highly leveraged to the real economy. So, while they have escaped fairly well to date, let’s see what kind of beating they take going forward.  This will be instructive to the health of U.S.banking.
  2. One would normally expect a slew of writedowns.  After all, it was writedowns on marketable securities which blew up the credit crisis in 2007 and 2008.  But FASB has fixed this problem.  So, let’s see how many writedowns result.  In truth, credit card debt used to be discharged in consumer bankruptcy.  But, the credit card lobby fixed that problem in 2005.  Now, the credit card companies may still be able to get their pound of flesh even if one files for bankruptcy. The key is whether you have a job or not due to a new bankruptcy means test.  The long and short for me is this: in the real world, since a high percentage of people defaulting on credit cards have lost jobs, we should expect the recovery rate to be much lower due to debt discharge in bankruptcy.  This should lead to a lot of writedowns at the likes of Citi, PM and BofA.  But, given recent FASB guidance on accounting for mark-to-market, it is anyone’s guess at this point.

Any way you look at it, though, higher loan losses mean less revenue.  How this gets reported over the near term is another matter altogether.

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