The Worst Is Over For Credit Card Companies, Or Maybe Not (BAC)

The head of the credit card operations at Bank of America (NYSE:BAC) believes that credit card write-offs will not continue to rise, and that they hit their high point in the last half of this year. “Most people think that charge-offs will be peaking right about now, in the third and fourth quarters,” Ric Struthers, president of global card services, said to Bloomberg. “That’s a realistic view.” The trouble with his comment is that it is not clear who “most people” are or whether they know what they are talking about.

Bank of America said credit card write-offs fell to 13.2% in October from 14.25% in September. Those figures obviously predate the holiday shopping season. People anxious to buy gifts for loved ones will often increase their credit card balances assuming that they can pay them off in early 2010. That won’t work if they lose their jobs. Unemployment is still rising and may do so for many months. There is no guarantee that credit card write-offs will improve and there is a case to be made that they will get worse.

The Bank of America comment about the future of consumer lending is based on the same premise of improved forecasts for bank financial results and better corporate earnings. The economy is getting better. Nobel Prize-winning economist Paul Krugman pointed out what a number of his peers have said in a recent column about employment in The New York Times. The recession may be over as economists define it. The average person does not experience it this way. That person’s situation is still too frightening.

It is interesting to look back on the beginning of the credit crisis. Mortgage-backed securities were supposed to be good investments based on forecasts of home loan defaults that were too optimistic. Once people stopped making mortgage payments in larger-than-expected numbers, the foundation of the MBS industry was destroyed. Things have not changed much, and the market has not learned much. The optimism about the prospects of corporate earnings and particularly bank earnings is based on a premise about the “real” economy that is not true. People who are not working do not make purchases and do not pay their credit card balances. They are lucky if their efforts to feed, cloth, and house themselves and their children are successful.

Many financial company stocks have done well in the last year, especially compared to their lows in March. Bank of America’s stock is up 120% since the beginning of April. The DJIA is up less than 40% over the same period and a number of experts think that the rise of the market over the last eight months is irrational.

The idea behind the argument that banks have seen the worst of consumer debt problems is based on the same premise as the one that says car sales will rise. Americans have paid enough of their bills and are happy enough about the future that their pessimism has bottomed out. That maybe true at Bank of America but it is not true almost any place else.

Douglas A. McIntyre