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Bank of America Credit Cards Less Than Prime

Posted by Larry Doyle on August 24, 2009 3:20 PM |

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

  • Spot on Larry. Their credit card default rate is only going to get worse as unemployment worsens and foreclosures increase. The only reason that Bank of America and Citigroup still are open for business today is because of enormous subsidies and aid from the Federal Reserve and the U.S. Government. Remember the article I sent you last week regarding how banks are starting to freeze/close people’s credit card accounts without notice? Bank of America will probably start doing that more and more, if they’re not already. I think the credit card business and credit cards in general are going to go back to the way they were 25-30 years ago – only people with very good credit, lots of assets (collateral), and stable, good income will qualify for credit cards. This means a minority of U.S. consumers will have credit cards at all. This will have a devastating impact on all retailers, restaurants, travel industry, commercial real estate, and the overall economy. I think it is underestimated how significant of a role credit cards play in our overall economy, as 70% of our economy is consumer spending and a significant portion of that consumer spending comes from credit cards.

    Matt

  • coe

    I’m on the fence as to how this will play out. During the heyday, it seemed all of us were getting a dozen solicitations a week from various credit card issuers – most aggressively and relentlessly from CapitalOne – these came for my wife and for me, but also for our children, and, no kidding, once even for our pet dog, whose “name” was probably purchased somehow without our permission from a veterinarian’s data base! It feels that this onslaught has tapered off somewhat, though not fully. On several levels, Bank of America has cultivated the brand reputation as being a thoughtful banking partner and underwriter of credit in its own residential mortgage and business loan books and in its counterparty exposure at the investment bank. Clearly, the same cannot be said of the consumer exposure in the credit card business line, and we all have read tons of reports highlighting that Countrywide was no angel in this department. Toss the size and scope of Merrill into the mix, and it’s very difficult to presume that the integrated firm will quickly develop a consistency of quality in terms of credit policies. I submit this not only affects legacy portfolio dynamics, but very much impacts the approach to new business. What is clearly required is leadership. After witnessing the saga of the king, Ken Lewis, and his court jesters in full frontal action on CNBC for nearly two years now, I guess the public, the shareholders, and the regulators can and are forming their own opinions about leadership. Yet the Board of Directors stays the course.

    TALF surely been a godsend to receivable securitizations (and watch its impact on the commercial sector!)…if and as banks like BAC turn off their credit card spigots, it undoubtedly will have a dramatic effect on consumer confidence and behavior…and the impact on the economy as a whole will prove to be significant.

    What’s in your wallet? A typical sampling – Citi/American Airlines VISA credit card; Citibank Mastercard ATM/debit card; Nordstrom credit card; Hertz card; Chase/Continental Airlines debit card; American Express platinum card…and a spate of other specialty cards – I wonder if anyone knows the average number of cards that the average working American carries around at a given time and exactly how much credit we have access to? Probably a pretty scary number given unemployment and general downsizing of paychecks…and yet isn’t it always the case that the woman in front of you on the grocery line writes a check for her $23.55 cent order – so go figure!

  • Imagine if all retailers and restaurants all became cash only. That’s basically the way it was 25-30 years ago. I’m not saying that will happen, I’m just saying imagine if that were to happen. Their business would PLUMMET overnight, as people would actually need to have cash and/or money in their checking account to buy stuff. I throw that out there just as an example of how significant of a role credit cards play in our consumer-spending-driven economy.

  • Randy Bowman

    Dare I say that “house of cards” seems a very appropriate term at this tenuous stage? .. and we know what usually happens to those, don’t we.

    I don’t agree a double dip recession is in the offing as I never considered this a recession in the first place. IMHO it is simply a debt crisis of epic proportions.. and it is not even close to being resolved at this early juncture. I think it is plain to see that the government’s data manipulation and sentiment orchestrations haven’t truly improved the underlying economy at all. They’ve simply added more debt by printing enough money to temporarily paper over the capital ratios of the major banks, which are still at considerable risk.

    Do any of us really think this is the last “stimulus” package to come out of D.C.? Do any of us feel truly comfortable that BofA and the other major banks have come totally clean about the depths of their delinquent and non-performing loan portfolios for all to see?

    You don’t need to be a financial wizard to drive around in your own communities all across the U.S. and notice the vacant storefronts, the plethora of for lease and for sale signs on block after block, the malls that are empty enough for you to roll a basketball from one end to the other without hitting anyone, the mostly empty sit down restaurants; and the notices you get in the mail from your bank informing you of their new and better interest rate (better for them, not for you) or shrinkage of your credit lines when you need them most, etc.

    BofA may be the current stand-out with regard to credit card delinquencies but I assure you there will be others popping up not only in that area but also in commercial mortgage delinquencies and the horde of foreclosures that they will attempt to delay as long as possible in hopes of some miraculous improvement in either current borrowers or in those who might consider taking such properties off their hands without the banks having to totally decimate their balance sheets and income statements in arriving at that point.

    I strongly suspect there is a great deal more pain to come and the consumer will not be a meaningfully active participant in this false recovery. Their only source of funds other than their jobs (which are disappearing by the second) was the equity in their homes and the income from their stock and bond portfolios. Both of those key areas have been battered almost beyond recognition and are unavailable for the average consumer to tap. As consumers retrench in response to these multiple financial shocks, stimulus for a recovery can only come from two potential areas: government spending (which is already crowding out credit availability for the consumer sector and thus exacerbating the problems) and/or corporate investment in technology to improve productivity and to build inventories.. neither of which is likely to be high on their list with dwindling sales revenues dictating continued retrenchment and cost cutting.

    Also, as I mentioned before.. the giant derivatives elephant is still in the room. The government simply decided to paint the room gray, hoping you would no longer notice.






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