Bank of America, American Express May Suffer as Credit Card Defaults Set Record [View All]

[Purveyor]

By Hugh Son

Feb. 19 (Bloomberg) -- Credit-card defaults may rise beyond 10 percent this year, breaking records and wiping out more than half of annual profit for lenders including Bank of America Corp. and JPMorgan Chase & Co., analysts said.

Loan failures are about to surpass a previous high of 7.53 percent as people losing jobs amid the U.S. recession can’t repay debt, according to Fitch Ratings. The defaults may peak at 10 percent to 11 percent of loans by yearend under a stress scenario, Goldman Sachs Group Inc. analyst Brian Foran said yesterday in an e-mail, reducing 2009 earnings for issuers including an almost 40 percent cut for American Express Co.

“The challenge is getting past the intensifying credit problems that will probably stay pretty rotten over the next six months or longer,” said John Williams, an analyst at Macquarie Capital in New York, who rates American Express and Discover Financial Services “underperform.”

Banks that already got cash from the U.S. Treasury after losses tied to mortgage securities may have to add billions to reserves for credit-card defaults, straining capital levels further. They are cutting credit lines, raising interest rates and scaling back on mail solicitations to brace for future losses. Citigroup Inc., Bank of America, JPMorgan, American Express, Capital One Financial Corp. and Discover are the biggest card lenders.

Charge-offs, or loans that banks deem uncollectible, reached 7.5 percent in December, according to Fitch Ratings analyst Cynthia Ullrich. The record of 7.53 percent was in 2005 after a change in bankruptcy law spurred a wave of filings, according to Fitch, which tracks a quarter of the $964 billion in U.S. credit card receivables. Unemployment worsened in January, rising to 7.6 percent, the highest rate since 1992.

‘Awful Year’

“This is going to be an awful year for the credit card industry,” Bank of America Chief Executive Officer Kenneth Lewis told lawmakers this month. “The more optimistic views are unemployment at 8 or 8.5 percent, and that would cause very high loss rates in the credit-card portfolios.”

MORE...

BLOOMBERG: http://www.bloomberg.com/apps/news?pid=20601213&sid=aadCHxMM8zbU&refer=home