Credit Card Losses: Chase Is Ready, Is Your Bank?

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Losses are starting to bubble, for some, but not all credit card issuers, as Bloomberg reports.

There is some optimism. Perhaps the increase is from the burn-off of recent account bookings, however, life at Chase, the nation’s largest issuer, still seems good. Bank of America seems to be running without stress, also.

There is a larger issue than this news article mentions. Accounting requirements for loss reserves change significantly on January 1, 2020. Chase already seems out in front of the issue as mentioned here and here.  JPMC pegs the risk at 35% to their loss reserve and is squirreling money away to cover the $5 billion risk.

CECL changes the approach to loan loss accounting and accounting firms in the United States commented on the incremental risk as you can see in this Mercator Advisory Group Viewpoint.

Operational managers and their reporting counterparts see write-offs in terms of 30-day cycles.  When accounts hit the 180 delinquent zone, cardholders age to contractual write-off. Write-off generates a charge to income. The Reserve Account, which is the target of Current Expected Credit Loss requirements, requires issuers to build pools of money into an account to smooth out losses as they occur. Instead of write-offs aging directly against the financials, the reserve account works as a cushion to ensure that issuers can cover the losses.

Chase’s position on this matter, the coming shift to accelerate write-off recognition, is a wise, conservative way to handle their large portfolio. Other issuers should take note; if Chase is anticipating a 35% increase, expect the range to be from 30-40% elsewhere.

And, that, more than current loan loss deterioration, is a big concern to card profitability.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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