Big credit card losses continue to dog U.S. banks

The banking industry has 3.4 billion reasons why credit card debt is proving to be a major pain in its neck.

Even as banks see their profits recover, a survey shows credit card losses continue to plague the industry. In its latest Quarterly Banking Profile, the Federal Deposit Insurance Corporation reported that the first three months of 2009 produced net income of $7.6 billion, the largest net profit for U.S. banks in four quarters. Nevertheless, credit card charge-offs -- the amount of credit card debt banks decide is not collectible -- surged $3.4 billion from the year earlier for a 68.9 percent increase.

The FDIC keeps tabs on the banking industry, stemming from its role as the government agency resposible for encouraging public confidence in the U.S. financial system by insuring bank deposits. The agency describes the quarterly profile as the "earliest comprehensive summary of financial results for all FDIC-insured institutions."

Banks acknowledge that they are operating in challenging times. "The earnings report released by the FDIC today demonstrates that banks are continuing to work through the problems presented by a difficult economy," said James Chessen, chief economist for the American Bankers Association trade group, in a prepared statement. Still, he said there are reasons for optimism. "Though first quarter earnings are down from what they were a year ago, they are the highest they have been in four quarters, and two out of every three banks increased their assets in the first quarter," Chessen said. Of course, billions of dollars in goverment initiatives have certainly helped get banks into the black.

Lending remains a weak spot. For all major loan categories (including loans to commercial and industrial borrowers, credit cards and real estate construction loans), net charge-offs climbed to $37.8 billion in the first quarter from $19.6 billion in the same period a year ago. Still, on a quarter-over-quarter basis, charge-offs were down from the $38.5 billion total in the fourth quarter of 2008.

Additionally, the FDIC found that credit card delinquencies increased quarter-over-quarter as cardholders increasingly made late payments. The amount of credit card loans that were 30 to 89 days past due totalled 3.09 percent in the first three months of 2009, up from 2.98 percent in the fourth quarter of last year.

Despite government initiatives aimed at boosting lending, including the Term Asset-Backed Securities Loan Facility (TALF), banks can't blame losses on their increased willingness to lend. In fact, the FDIC discovered what many consumer borrowers already know -- banks are doing quite the opposite, with the FDIC data indicating credit card card lines were reduced by $406.6 billion (or 9.9 percent) in the first quarter. That's a continuation of card issuers' ongoing approach, representing the fifth-consecutive quarterly decline in unused loan commitments. Overall, total bank assets fell by $301.7 billion as a few large banks reduced loan portfolios and trading accounts, creating a 2.2 percentage drop that is the steepest pullback in industry assets in one quarter in the 20 years for which quarterly data is available.

Meanwhile, banks posted total noninterest income that rose 12.8 percent -- to $68.3 billion in pretax earnings -- compared to the year before. Lenders also continued to set cash aside for potential future losses, with loss provisions surpassing net charge-offs by $23.1 billion as banks' loan loss reserves advanced 11.5 percent. Additionally, total equity capital of insurer institutions jumped $82.1 billion, for the largest quarterly increase since the third quarter of 2004.

Maybe that's why the industry doesn't appear too worried. "The vast majority of banks have been in existence for decades and the industry is taking prudent steps to assure that banks will continue to serve their communities for many, many more decades to come," the ABA's Chessen said.