When J.P. Morgan Chase and Citigroup announce earnings Tuesday, many analysts will be looking for profits in a traditionally less-than-exciting place: credit cards.
Unlike a few years ago, consumers are being smart with their cards, which means low delinquency rates, and they’re also starting to feel comfortable enough with the state of the economy to spend a bit more.
Credit cards look pretty good compared with mortgages or other low-interest bank products, says Jim Sinegal, who covers banks and credit card companies for Morningstar. They generally charge rates of “12 percent plus, up to 20 percent in some cases,” he says.
He says banks also like the steady income from merchants each time people use their cards.
Overall, the economy is stronger and the industry is reaping the rewards of tighter lending standards.
“That made for really good results in the way of losses,” he explains. “Banks aren’t losing much money at all because of those two factors.”
Ironically, the industry may also be benefitting from regulation. The CARD Act of 2009 sought to limit certain fees and simply interest rates.
“Obviously, the card industry did feel it had increased costs as a result of the regulation,” says Andrew Davidson, a senior vice president with Mintel Comperemedia. “They, I think, in the long term, benefit from this better consumer behavior in terms of paying back their bills.”
Davidson says card issuers are feeling confident enough to again pitch cards to mid- and sub-prime borrowers.
But Madeline Aufseeser, a senior analyst with Aite Group, cautions that credit cards are also a very competitive business.
“It’s bullish compared to where we’ve been over the last couple of years,” she says, though she notes that recent security breaches could be costly. “But in the credit card business, it’s a very tight rope that we walk on balance between expense and revenue. It’s a low margin business.”