Credit Card Debt Is Rising... Or Is It? (C, JPM, MS, BAC, AXP, V, MC, COF)

This morning’s report that Citigroup Inc. (NYSE: C) has downgraded its fellow banks’ earnings was based on fears that the European banking system is facing severe pressure from economic weakness on the continent and that the sovereign debt crisis is about to get worse.  Weakness in the US economy is also sending consumers back to an old stand-by: credit card debt.

According to the latest report from CardHub.com, credit card debt grew 66% in the second quarter of 2011 compared to the same period in 2010.  Relative to the second quarter of 2009, credit card debt is up a whopping 368%. High-interest credit card debt is all that’s available to consumers as the collapse of housing prices has turned off the ATM known as home ownership. Is the credit-fueled economy may be coming back?

Citi’s downgrade of JP Morgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) doesn’t include the banks’ exposure to a total of $787 billion in revolving consumer debt. Citi’s earnings upgrade for Bank of America Corp. (NYSE: BAC) is based on BofA’s sale of its stake in China Construction Bank and is a one-off gain. Card issuers American Express Corp. (NYSE: AXP), Visa Inc. (NYSE: V), Mastercard Inc. (NYSE: MA), and Capital One Financial Corp. (NYSE: COF) could benefit, or, if consumers, can’t pay their bills, the card companies could get hurt.

The CardHub report does not jibe with last week’s consumer credit report from the US Federal Reserve Bank, which noted a decline in revolving balances. The CardHub numbers include written-off dollars in its totals, which adds to the total of debt outstanding.

The good news for the card issuers is that the charge-off rate is declining. In the first quarter of 2011, CardHub reported a charge-off rate of 6.96%, which fell to 5.58% in the second quarter. Total dollars charged-off fell from $13.3 billion to $10.8 billion.

Interest rates on revolving credit are also rising. According to the Fed’s report, the rate on credit card debt actually assessed by credit card accounts was 13.10% in the second quarter of 2011, compared with 14.48% in the second quarter of 2010.

When CardHub extrapolates from the first two quarters of this year to an end of year total, the company estimates that consumer revolving debt will grow by $54 billion in 2011, after rising by a net $9.1 billion in 2010. The report gets interesting here, because it notes that even though total outstanding debt in 2010 fell by $66 billion, the entire drop was due to the write-off of bad loans.

Americans are paying down their debt, but only in the first quarter of the year. And the rate of payment has dropped in each of the last two years. CardHub estimates that US consumers will end 2011 with an additional $20 billion in credit card debt, compared with the end of 2010 total.

If charge-off rates continue to be low, the card issuers could enjoy some additional profitability, even though interest rates are falling. From the banks’ point of view, it’s better to get 13% on more payments that 14% on fewer.

In the first 90 minutes of trading, only BofA and Visa are posting modest gains today. BofA is up about 0.7%, at $7.03, in a 52-week range of $6.00-$15.27. Visa shares are up about 0.3%, at $86.64, in a 52-week range of %64.40-$90.67.

Paul Ausick