In the past few weeks I've written about first- and second-trust mortgages at the money centers. In this column I will address credit card debt being extended to individuals. This is a bit more complicated, as we must consider the money centers Citibank (C), JPMorgan Chase (JPM) and Bank of America (BAC), as well as the consumer credit companies Capital One (COF), Discover Financial (DFS) and American Express (AXP). Wells Fargo (WFC) is the seventh-largest holder, but it still carries a much smaller balance than the top six listed above, so I will not address here.
The first thing to note is that the money centers dominate this market, just as they do the mortgage market. There are about $7.5 trillion worth of loans, of all types, being held by all banks. About 8.75% of these, or $650 billion worth, are credit card loans.
Over half of these, or $362 billion worth, are concentrated in the money centers -- in Citibank, JPMorgan and BofA at about $137 billion, $114 billion and $111 billion, respectively. About one-third are concentrated in Capital One, Discover and AmEx at about $55 billion, $45 billion and $30 billion, respectively.
There are some very surprising and positive initial observations to make on this. Following the collapse of the subprime-mortgage market, the bond market for auto and consumer loans also collapsed. In order for banks and finance companies to continue staying in that business, we saw an increase in the need to carry loans rather than immediately sell them into the bond market.
As a result, the balance of credit card debt carried by the top six providers has roughly doubled over the past three years. Simultaneously, the value of nonperforming credit card loans has decreased by roughly 50%. Credit card charge-offs and delinquencies peaked in early 2009 and have been decreasing since.
There are countervailing issues behind these numbers, though. Even as consumer debt levels have risen along with minimum payments, interest rates have decreased. This has allowed borrowers with the strongest credit ratings to maintain access both to credit card debt and to service higher balances. This the same reason the U.S. treasury debt-service requirements have remained the same over this time frame, even though publicly traded sovereign debt has doubled.
But it must also be cautiously noted that the number of individuals with access to credit cards has declined during this time, and that the balances being carried by those with access to such has increased substantially faster than incomes or gross domestic product. On an anecdotal basis, we can surmise that credit card debt is increasingly being used to supplement income as a result of the economic malaise of the past few years. If that's indeed the case, we can surmise this is less indicative of consumer confidence than it is of consumer need.
There are initial signs that the ability is waning for this process to continue, as well. From the fourth quarter of 2011 to the first quarter of this year, credit card balances for all six of the top consumer credit providers declined by an average of about 6%. A reduction in credit card use is typically correlated with a reduction in consumer spending overall -- and indicative of a slowdown in economic activity.
This is not certain, though. During this same time frame, auto sales have increased dramatically and home sales have begun to rebound. Allocating cash flow into housing and autos may be the prime driver for the reduction in consumer credit use.
The bottom line is that the consumer credit market is stronger than it has been since the housing market began to contract -- and the banks have already absorbed essentially all of the residual nonperforming loans attributable the resulting recession.