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Banks Report Record Quarterly Increase in Sour Credit-Card Debt -- 2nd Update

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05/29/2019 | 04:57pm EDT

By Lalita Clozel

WASHINGTON -- Banks reported an annual increase in sour loans led by credit-card debt in the first quarter and a surge in past-due commercial and industrial loans, a federal regulator said Wednesday

The Federal Deposit Insurance Corp. in a quarterly report on bank earnings reported a 22.8% bump in commercial and industrial-loan balances that are 90 days or more past due. Banks also wrote off $12.7 billion in uncollectible loans, a 5.5% increase from the same time last year.

Net charge-offs for credit-card debt increased by $543.4 million over the last year, the largest such dollar increase relative to other loan categories.

The net charge-off rate has crept up in recent years, prompting large lenders such as Capital One Financial Corp. and Discover Financial Services to tighten credit limits. It has increased in eight of the past 10 quarters, the FDIC said, reaching 3.97% in the first quarter.

FDIC officials attributed the most recent sour credit card debt increases to a few banks that have lowered their underwriting standards. "There have been some banks that have relatively recently pursued a little bit more of an aggressive [approach]," said Pat Mitchell, a deputy director at the FDIC.

Banks have said they are wary of newer credit-score data that excludes some borrowers' performance during the financial crisis. Capital One's chief executive Richard Fairbank said during an earnings call last month that the bank was on the lookout for "degradation of performance of consumers for a given FICO score," referring to the widely used credit score.

Credit-card delinquencies are also becoming a growing issue for older borrowers, according to research by the Federal Reserve Bank of New York.

"Transitions into serious delinquency for credit card accounts increased again," the Fed said in a February report on household debt and credit. "It has risen sharply among older borrowers over the last two years."

Still, analysts don't view credit-card delinquencies as a major source of risk for banks.

Credit-card lenders are "relatively disciplined," said Warren Kornfeld, a senior vice president at Moody's. "They know if you drop standards, that could come back to haunt you."

FDIC Chairman Jelena McWilliams said "the competition to attract deposit and loan customers is strong, and therefore, banks need to maintain rigorous underwriting standards and prudent risk management."

The noncurrent loan rate remained relatively steady, with less than half of all banks reporting an increase in their balance of loans that are 90 days or more past due or troubled.

Banks saw an increase in noncurrent commercial and industrial loans, which increased by $3.3 billion in the first quarter -- the largest quarterly dollar increase since 2016. In its April survey of senior loan officers, the Fed found that banks had eased some terms for these types of loans to large and midsize firms, while keeping standards steady for smaller firms.

The figures on distressed debt came as bank profits in the first quarter of the year grew 8.7% over the same period last year, to $60.7 billion. The increase was driven by growing interest margins, the FDIC said. Banks retained $22.1 billion in earnings in the first quarter and boosted dividend payments by 25.9%, to $38.6 billion.

"In July, this economic expansion will be the longest on record in the United States," said Ms. McWilliams. "As a result, the nation's banks are strong."

To better weather credit risk, banks allocated $13.9 billion in loan-loss provisions, a nearly 12% increase from a year earlier. A large portion of the annual increase came from the largest banks, the FDIC said.

Write to Lalita Clozel at lalita.clozel.@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CAPITAL ONE FINANCIAL CORPORATION 2.13% 90.65 Delayed Quote.19.92%
DISCOVER FINANCIAL SERVICES 0.13% 81.74 Delayed Quote.38.59%
FIRST FINANCIAL CORP -0.58% 39.48 Delayed Quote.-1.10%
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Sales 2019 28 841 M
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Yield 2019 1,77%
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P/E ratio 2020 7,61x
EV / Sales2019 2,41x
EV / Sales2020 2,30x
Capitalization 42 569 M
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Richard D. Fairbank Chairman, President & Chief Executive Officer
Richard Scott Blackley Chief Financial Officer
Robert M. Alexander Chief Information Officer
Michael M. Johnson Chief Information Security Officer & Senior VP
Stan Meyers Director-Technology & Media