Banks squeeze borrowers as credit card losses rise

Credit card loss rates jumped an average 56% over the past year, Sandler O'Neill + Partners analyst Jeff Harte wrote in a report today, citing February data for credit card bond (securitization) trusts.

At Bank of America, "net charge-offs were 9.1%, compared with 8.3% in January" and 7.9% last fall.
At JPMorgan Chase & Co., "net charge-offs were 6.4%, compared with 6.0% in January" and 5.2% last fall.
At Citigroup, "net charge-offs were 9.3%, versus 6.95% in January" and 7.05% last fall.

Delinquencies (late payments) were also higher at all three banks, and highest (7.8%) at BofA. BofA and Chase base their credit card businesses in Wilmington, where together they employ over 10,000 people.

At American Express Corp., net loan losses are also "greater than expected," rising to 9.3%, vs 8.3% last month, writes Friedman Billings Ramsey & Co. analyst Scott Valentin.

Are borrowers really more likely to default, or are the banks just lending less? People are more likely to pay their bills when the economy is strong. And yet: Loss rates fall when banks are making lots of new loans, because new credit cards haven't had time to go bad yet; loss rates rise when banks stop making new loans, because the loans already on the books "mature" as time passes and larger proportion of old borrowers go broke, get sick, or die.

So is the economy getting weak, or are banks cutting people off because they're afraid of the economy getting weak? Both, writes Bloomberg here. Excerpt:

"Almost three-quarters of U.S. companies with fewer than 500 employees are experiencing a deterioration in credit or credit- card terms at a time when half of them depend on credit cards as a primary source of financing, according to a December survey of 250 firms by the National Small Business Association, a trade group with more than 150,000 members. The increase in credit-card costs has forced some business owners to stop using their cards, and at the same time declining credit limits are cutting their access to cash."