Sense on Cents

Why are banks tightening credit to the extent that they are extending credit at all? The mere fact that so many of their current loans and credit lines are increasingly delinquent and defaulting. Of the largest credit card outfits, one bank stands out as holding the worst performing credit card portfolio. Who might that be? Bank of America.

In fact, by banking standards Bank of America’s credit card portfolio would be considered sub-prime. Bloomberg highlights this development in writing, Bank of America Shuns Sales of Card Debt, Ducks Subprime Label:

Bank of America Corp., saddled with the worst credit-card default rates among its biggest rivals, is shunning the asset-backed securities market it tapped for $13.7 billion last year.

JPMorgan Chase & Co., Citigroup Inc. and American Express Co. are among issuers that sold $21 billion of card-backed debt this year through the Term Asset-Backed Securities Loan Facility, a Federal Reserve lending program to spur bond sales. Bank of America, the only major card-issuer that didn’t sell any, lacks enough quality loans in its credit-card trust to sell TALF bonds without being labeled a subprime issuer.

“I don’t doubt that Bank of America would like to re- engage that market,” said Michael Nix, who helps manage $600 million, including shares of the lender, at Greenwood Capital Associates in Greenwood, South Carolina. “The credit-card securitization market is starting to thaw, but there still isn’t a lot of demand, so the cost of issuance may be higher than the bank thinks is worthwhile.”

Christopher Feeney, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.

Bank of America’s 13.82 percent credit-card default rate in July, the highest among the biggest lenders, helps explain why loans in its credit-card trust are shy of the threshold that would allow it to sell debt through TALF and be labeled a prime issuer

Why is BofA’s credit card portfolio so much worse off than its major competitors and what are the implications of this reality?

1. BofA is obviously a nationwide firm, but it has outsized exposure in the West coast and Southeast. Why? Those regions are the home territories of its parent organizations prior to its most recent merger in 1998. Who are those parents? Bank of America based in San Francico at the time and Nations Bank based in Charlotte, NC. What is going on in those regions? Aside from Michigan, the states with the highlest level of mortgage foreclosures are Florida, California, Nevada, and Arizona.

2. Following point 1, if Bank of America is experiencing outsized delinquencies and defaults on its credit card portfolio, it only follows that it is very likely experiencing the same performance within its mortgage portfolio. Are they setting aside enough loan loss reserves for these portfolios?

3. Bank of America’s exposure to the West coast primarily and to challenged borrowers in general was only exacerbated by its purchase of Countrywide in 2008.

4. From a reputational standpoint, Bank of America must be cringing knowing that based upon its credit card performance it would be considered a sub-prime lender. Institutions the size and scope of Bank of America spend millions to develop a brand. Sub-prime is not the brand they are looking to develop.

5. What does the reality of BofA’s credit card portfolio mean to the institution? If it wanted to securitize and sell these assets, they would be forced to offer a higher rate — meaning BofA would get a lower price and proceeds. Over and above that, though, if BofA sold some of these assets at a ‘market price,’ it would not only book an actual loss on these assets but would then have to mark similar assets at that price. BofA certainly does not want to take that hit and may not be able to afford it.

What is the result? BofA sits with a portfolio which will likely continue to deteriorate in credit quality and will be stingy with credit lines to even top quality customers.

. . . so next time you hear a government official tell you how well the TALF program is working and credit markets are improving, ask them about Bank of America’s credit card portfolio.

LD

This entry was posted on Monday, August 24th, 2009 at 3:20 PM and is filed under Bank of America, Credit Card companies, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.