Even the largest bank in the country, JPMorgan Chase (NYSE: JPM), had only a net expense / total loan ratio of 0.60% at the end of 2019, and the banking giant has its own credit card division. Since credit card write-offs and delinquency rates often worsen during a recession or downturn, let’s see how some of the larger credit card companies in terms of the size of credit card debt for their overall health is maintained in these precarious times. Credit card loans to Capital One (NYSE: COF), American Express (NYSE: AXP) and Discover (NYSE: DFS) represent respectively 30%, 39% and 65% of the total assets of each company, making cards a key element of their success.
Image source: Getty
Prepare for losses
American Express was the only company to report positive profit in the first quarter of the year, and that profit decreased 76% from the first quarter of 2019. Discover reported a net loss of $ 61 million in first quarter, while Capital One suffered a net loss of $ 1.3 billion. Profits derailed after the three companies significantly increased the amount of cash set aside to cover potential future losses, otherwise known as the allowance for credit.
|T1 credit provision (billion)||Increase (linked quarter)||Total assets (billion)|
|Capital One||$ 5.4||198%||$ 397|
|American Express||$ 2.6||156%||$ 186|
|Discover||$ 1.8||116%||$ 113|
There are some interesting takeaways from the provisions. American Express is likely to have performed better because a smaller part of its overall portfolio is made up of credit cards. More than half of its total revenue comes from discounts – fees charged to merchants when card members use their American Express cards to purchase goods and services. Now, discount revenue has dropped significantly during the quarter, but you don’t have to book.
Another interesting point to remember is that the percentage increase in credit supply from these companies was not as high as some of the larger and more traditional banks like Bank of America (NYSE: BAC), which increased its provision by more than 400% compared to the related quarter.
This could be due to the fact that credit card companies have already set aside more total reserves. But you would think that companies like Capital One and Discover, with heavy credit card loan portfolios, could see a higher percentage increase in their credit supply, given the nature of their business.
Another big problem that hurts these businesses is the decrease in overall spending. A credit card is a type of revolving debt. Unlike an installment loan, borrowers do not receive a lump sum before spending it. On the contrary, they spend or borrow the money first and pay it back later. Less spending actually means less borrowing, as well as less interest payments and transaction costs.
Recently, the United States Department of Commerce said consumer spending fell 7.5% in March and a similar trend started in April. American Express revealed in its presentation to investors that proprietary billings – the company’s spending on American Express cards – fell by about 45% on an annualized basis in April, although they are showing signs of stabilization. The company has been particularly affected in travel and entertainment (T&E).
Image source: American Express
To discover is to see the same thing play out. Fifty-one percent of the company’s sales in 2019 were made in the travel (8%), restaurant (8%) and retail (35%) sectors. Between April 1 and April 19, the volume of business on an annualized basis decreased by 99% in travel, 60% in restaurants and 11% in retail trade.
Image source: Discover
Capital and liquidity
With heavy losses expected in the second quarter and the rest of the year still uncertain, the three companies made sure to point out that they entered the pandemic with solid capital positions. Capital One said it had $ 106 billion in total liquidity reserves from the Federal Home Loan Bank (FHLB) cash, securities and capacity at the end of the first quarter. American Express said its cash and investments balance increased to $ 41 billion by the end of the first quarter, while Discover said it had $ 19 billion in liquid assets and a large borrowing capacity.
The three companies are also planning to cut spending to further increase liquidity. American Express CEO Stephen Squeri said the company would seek to cut discretionary spending in the business by almost $ 3 billion and then redirect some of these funds to new products and longer investments term. Discover CEO Roger Hochschild said the company plans to implement approximately $ 400 million in cost reductions in the last three quarters of 2020. And Capital One CEO Richard Fairbank said the The company withdrew from certain marketing initiatives, tightened hiring and carefully managed operating expenses. .
Better positioned than 2008
Capital One, American Express and Discover also said that they felt much better about the overall quality of credit than they did before the Great Recession of 2008. Fairbank said that in general, the American consumer is in much better shape because consumer debt levels are one per capita lower, while lower interest rates make it easier to pay down debt and people save more than before. Hochschild said that while 26% of Discover’s credit card portfolio at the end of 2007 had a FICO score below 660, that number was only 19% at the end of 2019. Meanwhile, the CFO from American Express Jeffrey Campbell said that 88% of American consumers and small business business customers who have signed up for the company’s pandemic rescue program are members holding a primary and super premium card.