Growth in Revolving Credit Is Encouraging for Card Companies



Revolving credit

The latest Federal Reserve data on consumer credit were released on July 8, 2015. There was 2.10% growth in the revolving consumer credit levels in May—compared to 11.50% growth in April. The credit levels fell earlier in January and February. Revolving credit primarily includes credit card loans. It accounts for roughly a quarter of the total consumer credit.

The above graph shows the growth in revolving consumer credit over the past year. Growth in card loans benefits card-issuing banks like JPMorgan Chase (JPM). It also benefited payment networks like Visa or MasterCard, as we discussed previously in this series.

American Express (AXP), JPMorgan Chase, Citigroup (C), and Capital One Financial (COF) are some of the banks that will directly benefit from the growth in card loans. Together, the four banks account for ~16.40% of the Financial Select Sector SPDR ETF (XLF).

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Charge-off rates fall

For all of the banks, the charge-off rates on credit card loans fell to 2.98% for 1Q15. The rate was 3.03% in 4Q14. Charge-offs are the amount of loans charged against loan-loss reserves and removed from the books. On card loans, charge-off rates had generally been falling since 2010. The charge-off rates peaked to 10.63% in 2Q10. Defaults on card loans tend to go down as employment and income grow.

Charge-off rates impact card companies providing loans as well, like American Express (AXP) and Discover Financial Services (DFS).

Credit card interest rates

The interest rate on credit card loans is generally charged as the LIBOR rate plus a spread. The spread is determined based on the creditworthiness of the borrower. The average spread levels have been falling for overall card loans over the last few years. This is due to the improvement in the credit quality of card loans. Lower rates generally spur loan growth. This is a positive factor for card companies.


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