U.S. Banks Risk Losing Trump Card

--Accounting changes and credit card restriction will limit the profit of credit card companies By PETER EAVIS The golden age of credit-card profitability isn't on hold. It could be gone forever. As investors weigh the potential impact of new legislation on credit-card profits, it pays to remember that this sector is also being hit by other factors. As a result, credit cards could go from being a high-return business for banks to one where lenders struggle to achieve average returns, even in good times. The margins were always unsustainable. First, consumer impatience with the high cost of running a credit-card balance was always going to come to a head one day. Now, a tough Senate bill, to improve customer disclosure and restrict flexibility to levy fees and raise interest rates, looks set to become law. Card companies typically don't disclose the exact contribution of penalty fees to earnings. But the impact could be larger than expected, as one route to outsize returns was to target borrowers who rarely defaulted but often paid penalty fees. Off-balance-sheet funding was another once-advantageous practice. But planned changes to accounting rules could soon force card lenders to bring large amounts of loans back onto their books. In turn, they would have to hold more capital and reserves against their loans, damping returns on equity. Also, high credit losses in this recession has disproved a common boast from card lenders that they were uniquely skilled at setting appropriate interest rates to reflect the risk of each borrower. A final negative: Many consumers burned in the bust are going to be more cautious with their cards for several years. Credit cards obviously aren't going anywhere, but the industry's easy profits are over. Write to Peter Eavis at peter.eavis@wsj.com