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Big banks reveal challenges in consumer credit, mortgages

Brian Cheung

The largest U.S. banks hinted at declining quality in credit card lending and tight competition in the mortgage space, showing that consumer credit is becoming a harder business to compete in.

In third-quarter earnings, JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC) all posted higher income on interest-bearing assets despite pressures from the Fed’s rate hikes. The big banks relied on larger loan books to collect more revenue on higher interest rates.

One easy place to juice loan growth: credit cards. JPMorgan Chase, which had an impressive 6% year-over-year increase in average core loans, reported that it had expanded its credit card sales volume by 12%.

Challenges in loans

But the large banks are seeing challenging headwinds with in lending, as charge-off rates — a measure of defaulted balances — continue to rise. The Federal Reserve reported that credit cards in the second quarter of 2018 had a charge-off rate of 3.65%, 11 basis points more than the same quarter of 2017 and 62 basis points more than the same quarter of 2016.

JPMorgan Chase CFO Marianne Lake said Friday that while her company’s charge-offs remain “extraordinarily low,” she expects credit quality to continue its decline.

“Naturally as the cycle matures we will see [charge-off rates] rise but we aren’t seeing it yet,” Lake said.

JPMorgan Chase, Wells Fargo and Bank of America all reported increases in their net charge-off rates while Citigroup said net credit losses on its cards increased by 5% year-over-year.

Of course, every bank has a different approach to consumer credit.

Citigroup, for example, pursues big-name retailers to develop co-branded cards. In the third quarter, revenues on Citi’s branded credit cards were down 3% year-over-year, mostly due to the sale of its Hilton credit cards portfolio to American Express. On its third-quarter call, Citi executives clarified that if the struggling retailer Sears (SHLD) does resort to full liquidation, the total impact would be about $300 million.

Wells Fargo and Bank of America have been more aggressive in growing their credit card loan books. In the third quarter, Wells Fargo expanded its card business by $1.1 billion as it continues to push its no-fee “Propel” card. Bank of America boosted its credit card loans by about $3.1 billion.

Mortgages: ‘We’ve not seen any meaningful improvement’

In this Tuesday, Aug. 21, 2018, photo, a home has been sold sign in Melrose, Mass. On Thursday, Aug. 23, Freddie Mac reports on the week’s average U.S. mortgage rates. (AP Photo/Elise Amendola, File)
In this Tuesday, Aug. 21, 2018, photo, a home has been sold sign in Melrose, Mass. On Thursday, Aug. 23, Freddie Mac reports on the week’s average U.S. mortgage rates. (AP Photo/Elise Amendola, File)

The big banks also reported languid activity in residential mortgage lending, a sign that the appetite for home purchases is weakening.

Lake said she would expect the overall market to be down about 10% year-over-year. JPMorgan Chase’s home lending business in the third quarter brought in 16% less revenue compared to a year ago, down to $1.3 billion.

Lenders are likely facing difficult conditions in the space because of rising rates and a wealth of competition — exacerbated by the increased presence of nonbank lenders like Rocket Mortgage.

Wells Fargo CFO John Shrewsberry said a tight market has led to high pressures on pricing margins. The company saw its mortgage banking income decline 19% year-over-year to $846 million.

“We’ve not seen any meaningful improvement,” Shrewsberry said of pricing.

At Citi, where total mortgage loans on book increased by 1% year-over-year, CFO John Gerspach was hopeful that lower U.S. mortgage revenues “should abate going forward.”

Bank of America appeared to have the most mortgage activity and expanded its residential mortgages by 5% compared to last year. The company said 20% of its total consumer mortgage applications were done digitally, showing Bank of America’s willingness to take on its nonbank competitors.

The market for mortgages is steadily expanding; the Mortgage Bankers Association says that home mortgage purchase applications are higher in 2018 than they have been in the last four years. But the MBA still notes that low supply and increasing mortgage rates are holding consumers back from growing home purchases.

Brian Cheung is a reporter for Yahoo Finance.

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