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Banks in the United States are finally seeing an increase in credit card borrowing.

Big U.S. banks like JPMorgan Chase & Co. and Citigroup are expected to benefit from a recovery in the battered credit-card market, but a future recession would drive consumers away and result in loan losses.

Jamie Dimon, the chairman and CEO of JPMorgan Chase & Co., recently warned of rising recession risks and prepared investors for a possible “storm.”

Cards are one of the most profitable industries for banks in a stable economy, and analysts say a continued increase in card borrowing would provide relief to banks.

When consumer spending plummeted as a result of the pandemic, Citigroup hit rock bottom, with quarterly revenue from Citi-branded cards in the United States falling 13% from a year earlier in 2020.

According to Federal Reserve data, aggregate credit card and comparable loan balances at U.S. banks are up 15% from a year ago, and are back near pre-pandemic levels as of May 25. Even better for the banks, cardholders are now letting more of their balances to circle, resulting in interest costs, rather than paying them off monthly.

Even while banks rarely reveal the level of revolving balances, doing so is crucial since interest from revolving accounts generates significantly more income than transaction fees from merchants, some of which are shared with card networks like Visa and Mastercard.

According to Barclays analyst Jason Goldberg, “the most profitable aspect of the credit card business is the consumer revolving balances and then paying them back over time.”

Revolving balances at JPMorgan are up 8% from the low, according to Marianne Lake, co-chief of the Chase consumer bank, who spoke at an investor conference in May.

Due to stimulus funds and cash from refinancing homes, customers curtailed credit card spending and paid down debt like never before during pandemic lockdowns.

After falling to 51.3 percent during the pandemic, the share of active card accounts with revolving balances has increased for the last two quarters, reaching 52.6 percent. According to data from the American Bankers Association, those balances typically prevailed at approximately a 60 percent level over the seven years prior to COVID-19, after reaching as high as 70 percent during the 2008 financial crisis.

Populist Myth

According to the banks, cardholders are currently repaying their debts a little more slowly, which has led to bigger interest-bearing balances. For instance, Discover Financial Services claimed that although payment rates had leveled off and even slightly decreased in the first quarter, they were still much higher than they were prior to the pandemic.

Last year, banks increased card marketing and loosened credit standards they had enforced earlier in the pandemic as lockdowns were lifted.

According to credit reporting company TransUnion, the number of credit cards issued quarterly increased by 39 percent from a year earlier to 21.5 million, the biggest number ever and 14% more than before the epidemic.

According to JPMorgan’s Lake, Chase, the largest card issuer in the US, has discovered evidence to allay some investor concerns that customers have turned their backs on credit cards.

Contrary to common belief, younger generations do not dislike credit or credit cards, according to Lake. Customers of Chase from the Millennial and Gen-Z generations use credit cards for 60% of their purchases. And as kids get older, she continued, they are borrowing more.

Now that the Federal Reserve is tightening its monetary policies, some investors are concerned that the banks may benefit excessively from the promotion of credit cards.

The banks claim that they have learned from the financial crisis that it is more important to know who to lend money to and how much than to try to predict recessions.

Despite the fact that card delinquency rates have increased over the last three quarters, TransUnion data shows that they are still below pre-pandemic levels. According to Federal Reserve data, the charge-off rate for poor credit card loans at banks increased in the first quarter to 1.82 percent from 1.57 percent. That is low enough for banks to generate money and is half what they were prior to the pandemic.

According to Goldberg of Barclays, unemployment, a major factor in credit card losses, is currently low and wages are increasing.

It should be a fairly profitable business in the short term, according to Goldberg. However, banks must be cautious about the upcoming financial crisis.

Marcadis Singer, PA
5104 South Westshore Blvd.,
Tampa, Florida.
Phone: (813) 288-1881

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