Banks brace for debt-related losses

Colorado Springs Business Journal, Apr 7, 2006 by Rob Larimer

A possible spike in credit card charge-offs during the second half of the year could cause profit losses for banks already battered by hurricane-related bankruptcies.But not all bankers are expecting another wave of debt-related losses.This year, new federal guidelines that require increased monthly minimum credit card payments went into effect - at a time when bankruptcy numbers hit all-time highs during the fourth quarter 2005 because of hurricanes and legislation making it more difficult to declare bankruptcy.Some bankers predict they'll see a higher number of defaults on payments later this year when customers - already struggling to pay bills - feel the effects of the higher minimum payments.It's all speculation really, said Don Childears, president of the Colorado Bankers Association.

There is some concern that people are going to have a harder time making higher payments, but no one really knows what's going to happen.J.P. Morgan Chase said in filings with the Securities and Exchange Commission that bankruptcy charge-offs hurt profits during the fourth quarter 2005 and that the number is likely to increase. I know that at the end of last year we saw bankruptcies spike something like 30 percent, said Wayne Paton, Chase market president for the Springs.Paul Hartwick, a spokesman for Chase Card Services Division, which oversees about 110 million credit card accounts, said the bank is looking to the second half of the year with some trepidation.Right now it's a bit of a wild card because we don't know what we're going to see, he said. But, it's not at all unreasonable to expect that we'll see the charge-offs and delinquencies spike again.Prior to the higher minimum payment mandates, about 10 percent of all J.P. Morgan Chase card customers were making only the minimum payment, Hartwick said, adding that number could double this year.U.S. Bank's expectations differ, however.Spokeswoman Amy Frantti said that like Chase, about 10 percent of cardholders made minimum payments, but that U.S. Bank officials doubt that number will increase later this year.Even though speculation about what could happen varies, Childears said the higher minimum payments couldn't come at a worse time.According to its SEC report, J.P. Morgan Chase operating earnings were down 41 percent last year, from $302 million in 2004 to $213 million in 2005, because of increased bankruptcies.Bankruptcies also caused J.P. Morgan Chase's 2005 net revenue to fall 3 percent, or $109 million from 2004, according to the SEC report.The new minimum credit card requirements were set by the Office of the Comptroller of the Currency, an arm of the U.S. Department of Treasury that regulates most banks and some credit card companies.Officials made the decision to ensure that cardholders would make progress in lowering their balances, and not get into a negative amortization or chronic over-limit situations.About 46 percent of American families carry a credit card balance. That's up from about 44 percent in 2001, according to numbers from the most recent Federal Reserve Consumer Finance Report.The report also says that the average credit card balance is growing, up from $4,400 in 2001 of $5,100 in 2005, nearly 5 percent of the median income for American families.The impact of the new minimum payments won't be known for a few quarters, Hartwick said, adding that he expects bankruptcies to be down for the first half of 2006 after the surge last year.Some analysts have suggested banks could be forced to reduce interest payments in order to keep customers from defaulting.Hartwick said that's an option J.P. Morgan Chase has yet to consider.