Major credit card company, Bank of America is expecting write-offs to reach its peak this quarter. That is, if unemployment rates go as forecasted. If it goes higher, the company may have to rethink its expectations.
However, President of Global Card Services for Bank of America, Ric Struthers, is confident that the write-off peak is just around the corner. "Most people think that charge-offs will be peaking right about now, in third and fourth quarters. That's a realistic view", he said.
Among major credit card companies in the U.S., Bank of America was hardest hit by the credit crisis. This year, up to September 30, the bank wrote off an equivalent of $14.3 billion in credit card loans. That is an astonishing 76% more than any company did during this same period just last year.
Credit card defaults usually follow unemployment rates of the country. This October, unemployment rates reached 10.2%. Struthers gave no specific jobless rate target, but the worst forecast for unemployment rate predicts a peak of 11% which would happen during mid 2010.
During the last four quarters, Bank of America posted losses for two quarters. However, the bank is on a rebound as its credit card unit begins to show improvement. The largest segment for Bank of America for the first nine months turned out to be its global card services. This segment contributed 23% of net revenue to the company and 36% of income before taxes and provisions.
Bank of America's recovery is not an isolated case. Goldman Sachs Group just lowered its credit card industry cumulative losses forecast to 20% to 23% of the total loans for 2009 and 2010. Originally, the group predicted it to be 23% to 28%.
"Losses are already rolling over and falling below the annual loss rate implied by our old forecasts", analyst for Goldman, Richard Ramsden, reported.
According to Bank of America, credit card write offs fell to 13.22% in October from 14.25% in September. Write offs for the company reached a high of 14.54% in August, this year. Bank of America still has the highest rate of losses among six major credit card issuers in the country.
Bank of America was severely affected during this crisis because it also held the largest credit card portfolio in the world. This company's card portfolio grew at an astonishing rate from 2006 to 2008, even if, at the time unemployment was already becoming a problem. Exposure of the company in Florida and California, two states severely affected by weak property markets and high unemployment rates, also made a huge impact.