As American consumers have ramped up their personal credit, U.S. banks have happily gone along for the ride. Almost $1 trillion of household debt is on credit cards, a business that has generated handsome returns for lenders like Citigroup, JPMorgan and Bank of America. But Covid-19 is taking the shine off a nice earner.
Credit cards make up a quarter of Citi’s revenue and a slightly lower share of its loans. JPMorgan has a similar sized credit-card portfolio that accounts for only 15% of its larger stock of loans. Bank of America and Wells Fargo have smaller card businesses but all have grown their balances in the past five years. For good reason: The yields on credit cards tend to be above 10% on average, twice the return on regular loans. And for years, consumers’ credit has been so good that JPMorgan boss Jamie Dimon called it “pristine.”
The global pandemic is changing that, as earnings from Citi and BofA on Wednesday illustrate, as well as JPMorgan and Wells Fargo’s reports a day earlier. Rising unemployment means hardship. BofA said 80% of customer requests to delay payments relate to its credit-card business. The amount that’s more than one month overdue hasn’t risen at most big issuers, but they are already preparing for that. JPMorgan is now cushioned against a potential 9.7% loss. At Bank of America, it’s 8.3%.
Moreover, card businesses suffer when people don’t spend. In a lockdown they can’t, but afterwards they may not want to. Wells Fargo said card purchases fell 15% in March compared with a year earlier. Bank of America noted that spending growth on debit and credit cards has fallen from nearly 8% last autumn to 2%. After the financial crisis, total credit-card debt declined by one-fifth within three years, according to New York Federal Reserve data.
For banks, the good times justify the low returns in tough periods. But the difference is large. As a rough rule of thumb, credit-card loss rates have matched the level of overall unemployment in crisis periods, so as joblessness passes 10%, many card portfolios will stop making money. Banks and their customers face an old-style consumer downturn with a modern reliance on plastic.