4 Wall Street Banks Reported $12.5 Billion in Credit Card Losses

Banks Reported Credit Card Losses
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In 2017, four Wall Street banks suffered a combined $12.5 billion in losses from their credit card divisions. This is quite concerning, since the losses are roughly $2.0 billion more than what those banks reported in 2016.

Contributing to the $12.5 billion in losses was JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC), Bank of America Corp (NYSE:BAC), and Citigroup Inc (NYSE:C).

Even though big banks are suffering billions of dollars in losses from their credit card divisions, they continue to market credit cards to customers. This includes giving customers special offers such as extra air miles, bonus reward points, special high-interest cashback rates, voiding annual fees, and more.

A big reason for the increased marketing is that credit cards offer a return of roughly four percent to the banks, which is compared to roughly 1.4% for retail banking. This is because credit cards offer two revenue streams for the banks: the first is that every time the card is swiped, the bank earns a fee. It is similar to earning a fee from a licensing deal for a product or service. The second revenue stream is when there is a balance outstanding and the bank charges a high interest rate to the customer. The rate could be as high as 20% or 30%.

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Increasing Losses From Credit Card Divisions Is a Big Concern

The last economic recession was caused by big banks giving out real estate loans to consumers who were unworthy (financially). Now, almost a decade later, it seems that the big banks are going down the same path, except this time it’s through credit card offerings.

To provide support to this thesis, former credit card executive Brian Riley, who is currently a director at Mercator Advisory Group, Inc., said, “The driving factor behind the losses is that banks are putting weaker credits on the books.”

The same big banks that are marketing to gain more credit card customers are also setting aside more cash in reserves to deal with future losses. For example, JPMorgan added $200.0 million to its future liability reserve funds in order to handle more credit card losses.

Another example of things not looking bright is found in the fourth-quarter earnings that were reported on January 17 by Bank of America. Outstanding average balances held by U.S. Bank of America credit card customers have increased by more than two percent over the third quarter and more than 4.4% when the results are compared to the previous year.

More concerning is that Americans have surpassed $1.0 trillion in credit card balances held, and this number continues to grow, with Americans having no plan to reduce their debts.

Conclusion on Growing Credit Card Losses

Yes, the argument could be made that the big banks are being more proactive with their balance sheets by setting funds aside to cover future losses. However, the purpose of the business is to generate a profit. If the banks were stricter with their credit card rules, there would be no need to set so much money aside. If the big banks continue on this path of handing out more credit cards and setting money aside to cover losses, there could be an economic decline felt by the country.

Sources: 

Big Four U.S. Banks Hit With $12.5B In Credit Card Losses,” PYMNTS.com, January 22,2018.

Full-Year 2017 Results,” JPMorgan Chase & Co., January 12,2018.

Bank of America Reports Q4-17 Net Income of $2.4 Billion, EPS $0.20,” Bank of America Corp. January 18, 2018.

Americans now have the highest credit-card debt in U.S. history,” MarketWatch, August 8,2017.

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Categories: Economic Report, News

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