New bankruptcy laws, minimum payment rules and Katrina have set up a perfect storm for credit card issuers. The sheer magnitude of the spike in bankruptcies experienced immediately before the new legislation became effective was larger than most credit card issuers anticipated. The courts are still working to clear the backlog of “old law” filings. More than 200,000 Americans may have filed bankruptcy petitions in the final ten days prior to the full implementation of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” which took place October 17th. In September, bankruptcy filings topped 200,000.
This week, American Express said it expects total managed writeoffs in the U.S. consumer and small business portfolios to be $175 to $250 million higher than the third quarter due to the bankruptcy surge. Capital One also noted this week that bankruptcy-related charge-offs hit a record $382.4 million in October. Capital One previously took a $44 million charge related to the Gulf Coast hurricanes and a $75 million loss related to the surge in bankruptcy filings in the third quarter. The nation’s largest issuer, JPM Chase, reports its third quarter operating earnings were impacted by a $100 million special provision for Hurricane Katrina credit losses and an additional $100 million provision for credit losses related to increased bankruptcies. Discover says it expects that the pre-tax charges in the current quarter resulting from additional bankruptcy notices will increase by $200 to $250 million over those experienced in the same quarter of last year. Citibank says the the increase in bankruptcy filings added $200 million to its credit costs and Hurricane Katrina added $110 million during the third quarter. HSBC says it recorded an additional $100 million credit loss provision relating to the bankruptcy filings in the third quarter.
It appears that the bankruptcy surge of September and October will impact all credit card issuers’ fourth quarter earnings.
On top of the double trouble of Katrina and bankruptcy filings, issuers are in the process of raising minimum payments for cardholders paying higher interest rates. There are already indications that the higher payments will likely increase delinquencies and charge-offs. Most cardholders paying interest rates above 25% are generally weak credits, and may currently be struggling with card payments. Under the new rules issued by the Federal Financial Institutions Examination Council, minimum payments on some accounts will double.