Credit card charge-offs another ill omen for banks

Charlotte —- U.S. banks charged off 5.47 percent of all credit card loans in the second quarter, according to the Federal Reserve, representing $50 billion they’ll probably never collect.

First came trouble with mortgages, then home equity loans and commercial real estate. Now, banks are starting to worry about credit cards.

As the economy slows and unemployment rises, consumers are defaulting on credit card payments more often. That trend is unlikely to create a crisis in line with the mortgage fallout, but it is a headache for banks that are already hurting.

The charge-offs are up from 3.85 percent the year before, and that movement is on the radar of Ken Lewis, chief executive of Bank of America Corp.

Asked in a recent TV interview if credit card debt would be “the next shoe to drop” for the banking industry, Lewis replied: “It, in some ways, already is,” adding that such losses have risen “pretty substantially.”

Laura Nishikawa, an analyst at the Innovest ratings agency, predicts banks such as Bank of America and Citigroup Inc. could be hit especially hard by credit card defaults. That’s because those banks, which offer both consumer and investment services, have been depending more heavily on consumer services such as credit cards as the returns in investment banking grow increasingly unpredictable.

To be sure, credit cards don’t represent a huge portion of assets for most banks. For example, they comprise about 14 percent of all consumer loans and leases at Bank of America, the country’s largest credit card issuer. The main problem, Nishikawa said, is that “everyone is so weak after what happened with mortgages that another blow to a consumer product would be hard to handle.”

Consumer groups have long complained that credit card issuers push cards onto people who don’t need them or can’t afford them. They say rising credit card defaults —- just like mortgage defaults —- are largely the fault of banks who lent to risky borrowers.

Innovest estimates about 30 percent of Bank of America’s credit card loans are to subprime borrowers —- second only to the failed Washington Mutual Inc., which had almost half of its credit card loans held by subprime borrowers.

Innovest also estimates that more than half of Bank of America’s credit cards are high-limit cards —- second only to American Express Co. (Innovest classifies high-limit cards as those with lines of more than $10,000.) Bank of America’s charge-offs, or loans it doesn’t expect to collect on, increased to 6.14 percent of all credit card loans, or $1.24 billion, in the third quarter. That’s up from 4.61 percent the year before.

Executives of Wells Fargo & Co., which is buying Wachovia Corp., also noted credit card troubles. The San Francisco bank, the country’s eighth-largest credit card issuer according to The Nilson Report, saw card charge-offs increase to 7.2 percent, or $361 million, from 4.3 percent a year ago.