Charge-Offs Start to Shred Card Issuers

--pay attention the delinquencies of 60 to 89 days --delinquencies of more than 180 are charged off --roll rate, deliqneuncy to charge off, is on the rise More credit-card holders who fall behind on their payments are eventually defaulting, deepening losses for thousands of banks that issue plastic. The worsening trend indicates that charge-off rates among credit-card issuers, which stood at more than 6% in the third quarter, are poised to rise more than expected in the fourth quarter and into next year. That means additional misery for financial firms already besieged with losses on everything from soured mortgages to bad bets on capital markets. Card-industry executives are worried about escalating "roll rates," a term that refers to the percentage of cardholders who go from merely late on their payments to not making them at all. Among cardholders who are between 60 days and 89 days overdue, about 20% of such card balances eventually are being charged off by card issuers as uncollectible, according to Auriemma Consulting Group Inc., a Westbury, N.Y., financial-services consulting firm. The percentage is up by about a third from last year, before the U.S. economy tipped into recession. The problem can be even worse for bundles of outstanding credit-card balances that are securitized by some of the largest issuers. For example, American Express Co.'s roll rate worsened to 47% in the third quarter from 35% a year earlier, says investment bank Keefe, Bruyette & Woods Inc., which calculated the figures from securities filings. At Capital One Financial Corp., known for its cheeky ads and mass-market strategy, the roll rate has reached 34%, up from 28% in last year's third quarter. Those figures don't reflect credit-card loans that the issuers keep on their books. Much of the surge is being blamed on rising unemployment, typically a leading indicator of credit-card performance. November's loss of a half-million jobs will make it impossible for even more cardholders to make their payments on time. Others who already are delinquent in their payments will be unable to catch up. "They're rolling through a lot faster, and once they go bad, there's nowhere for them to turn," one credit-card industry executive says. "There is definitely concern" about the rising percentage of cardholders who can't resume timely payments on their cards, says Mike Viola, a managing associate at Auriemma. The three largest U.S. card issuers are J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. Those three banks had nearly 60% of the $724.44 billion in outstanding loans at the 10 biggest card issuers in the U.S. as of June 30, according to the Nilson Report, a Carpinteria, Calif., newsletter that follows the industry. Card issuers are scrambling to reverse the trend, with moves that include cutting credit lines to some customers and contacting cardholders before they become delinquent. In a report last week, Meredith Whitney, a banking analyst at Oppenheimer & Co., estimated that card issuers will reduce credit lines by more than $2 trillion in the next 18 months. But some of the actions aimed at mitigating losses, such as raising minimum payments and interest rates, also can make it harder for struggling cardholders. Capital One, of McLean, Va., is boosting payment requirements for delinquent customers. "We expect that the implementation of this policy will cause delinquencies and roll rates to increase starting in early 2009," Gary Perlin, Capital One's chief financial officer, told analysts in October. Fewer J.P. Morgan cardholders are falling behind on their payments. Once they do, though, "more of them are going through to charge-off," says Gordon Smith, who runs the New York bank's credit-card business. J.P. Morgan had $157.6 billion of outstanding credit-card loans as of Sept. 30, up 6% from a year earlier. Card issuers divide shaky balances into so-called delinquency buckets, which represent customers at various stages of tardiness in their bills. Customers flow through the buckets, divided into 30-day increments, based how far behind they are. Most card companies write off the loans after a customer is delinquent for 180 days. Data for cardholders deemed delinquent by fewer than 30 days aren't considered especially meaningful. Some of those customers are assumed to have forgotten to pay a bill before leaving town. Experts pay much more attention to delinquencies of 60 days to 89 days, because that typically reflects borrowers in financial distress. Roll-rate disclosures vary by card issuers. To examine the trends, analysts scour monthly data tracking loans that have been securitized. While those figures don't reflect an issuer's entire card portfolio, they are widely viewed as reliable indicators. In the third quarter, Discover Financial Services' roll rate climbed to 39% from 32% a year earlier, according to Keefe, Bruyette & Woods. November data is expected starting next week.