Why US credit card investors are shrugging off surging delinquencies
Returns on equity are far higher than those elsewhere in the banking sector
Storm clouds are gathering over the credit card industry. Americans have run through their savings and are falling behind on their loans. Regulators want to cap the late fees that large card issuers can charge to $8 — less than a third of their current levels. Yet you wouldn’t know it from the share prices of the card companies.
American Express shares are close to record highs, up 40 per cent over the past year. Synchrony Financial, which provides cards for stores such as JC Penney and American Eagle Outfitters, has gained 45 per cent. Capital One Financial, which is buying rival Discover Financial Services, is up 50 per cent.
Americans held more than $1.1tn on their credit cards at the end of 2023, an all-time high. Nearly 10 per cent of this balance was in serious delinquency (defined as 90 days or more late), according to the Federal Reserve Bank of New York.
More alarming is the rate at which people are becoming seriously delinquent. This surged to 6.4 per cent in the fourth quarter, up from just over 4 per cent at the end of 2022 and the highest level in more than a decade.
The stress is most acute for younger borrowers and those with poor credit scores. Amex, with wealthier borrowers, reported the lowest 30-plus-day delinquency rate among the six major US card issuers during the fourth quarter, at 1.3 per cent. JPMorgan Chase and Bank of America were at 2.1 per cent and 2.3 per cent. At Capital One and Discover this was nearly 4 per cent.
Cutting late fees also won’t affect companies equally. These revenues grew to more than $14bn in 2022 of the $130bn issuers charged consumers in interest and fees, according to the Consumer Financial Protection Bureau.
Smaller, standalone credit card companies such as Bread Financial look most vulnerable, suggests S&P Global. Subprime borrowers account for about 43 per cent of Bread’s balances last year. The cap could reduce its revenue by about 25 per cent.
But Synchrony is also exposed, with late fees responsible for nearly a fifth of its operating revenue in 2023. Nonprime borrowers account for about 28 per cent of its credit card balances. Its partner agreements with retailers means some of the impact from loss of late fees will be shared.
Credit card companies are high-margin businesses, with returns on equity far above those elsewhere in the banking sector. Amex reported a 33 per cent fourth-quarter return on average common equity. In the coming storm, not everyone will get a soaking.