Credit card defaults please Wall St, shares up

The Capital One headquarters in McLean, Virginia, August 21, 2007.

NEW YORK (Reuters) - U.S. credit card companies said defaults and delinquencies were lower in June than analysts feared, sending the shares of some up over 10 percent and helping the stock market rally on Wednesday.

And with American Express Co forecasting better business in the second half of the year, investors saw their first meaningful glimmer of hope about the credit picture since last fall.

American Express posted its first decline in chargeoffs -- loans the company does not expect to be repaid -- in a year, while JPMorgan Chase & Co and Discover Financial Services also surprised analysts with fewer defaults for the first time since October.

In addition, accounts at least 30 days delinquent -- often an indicator of future defaults -- fell in June across the industry, with American Express and Capital One Financial Corp posting their fourth-straight monthly declines.

The reports may signal that American consumers' credit positions are not deteriorating as rapidly as feared, despite rising unemployment and the continuing housing slump.

"A lot of the weaker customer base has already charged off," said Sanjay Sakhrani, an analyst at KBW. "You have a better core portfolio. But that is not to say that portfolio is not immune from what is going to be a weaker macroeconomic backdrop."

American Express, the largest U.S. credit card company by sales volume, said its default rate inched down to 9.9 percent in June from 10 percent in May, according to a regulatory filing. It was its first monthly decline in a year.

The company said defaults rose to 10 percent in the second quarter from 8.5 percent in the first quarter, but were below its estimated range of 10.5 to 11.0 percent.

American Express also said it was highly likely that defaults would be lower than expected in the second half of 2009, "if delinquency and bankruptcy trends continue to be below previously expected levels."

JPMorgan -- the largest issuer of Visa credit cards -- reported that defaults declined to 8.04 percent in June from 8.36 percent in May, while Discover's posted defaults fell to 8.75 from 8.91 percent.

Citigroup -- the largest issuer of MasterCard branded cards -- said defaults were almost unchanged at 10.5 percent, while Capital One's chargeoff rate rose less than expected to 9.73 percent from 9.41 percent.

"Overall, delinquencies and chargeoffs were a little bit better than expected, reflecting maybe stabilization in some of these trends," said Walter Todd, portfolio manager at Greenwood Capital Associates.

American Express shares jumped 11.28 percent to close at $27.22, their highest closing in 10 weeks, while Capital One soared 11.81 percent to $25.84. Discover closed up 6.16 percent at $10.85 and JPMorgan gained 4.5 percent to $36.26.

The Dow Jones industrial average ended the day 3.07 percent higher.

But other data showed consumers remain under pressure. Bank of America Corp, the largest U.S. bank, said on Wednesday its default rate rose to 13.81 percent in June from 12.5 percent in May.

The bank is paying a price for its rapid expansion in recent years and has one of the highest concentrations of subprime borrowers among the top card issuers, analysts said.

It also has a large exposure in California and Florida, two of the states hit hardest by the housing crisis and high unemployment.

FBR analysts said of Bank of America's performance that, "losses continue to increase at an alarming rate and show further separation from the growth in unemployment."

MORE LOSSES AHEAD

Analysts cooled expectations by saying the drop in credit card delinquencies was largely a seasonal trend as consumers used tax refunds to pay off debts. They expect late payments to rise in coming months.

And credit card chargeoffs remain on track to reach record highs before peaking around at the end of 2009 or in early 2010.

"Given the continued weak employment data -- increasing unemployment rate, fewer hours worked, stagnant wages -- we view the recent strength as seasonal," FBR analysts said in a research note.

Credit card defaults usually track unemployment, which rose in June to a 26-year high of 9.5 percent and is expected to peak at more than 10 percent by year-end.

Analysts expect credit card default rates to peak at between 12 and 14 percent between the end of 2009 and early 2010, with losses topping $100 billion. They do not expect the credit card industry to be profitable until 2011.

Credit card lenders are trying to protect themselves by tightening credit limits, raising standards and closing inactive accounts. They have also been slashing rewards, increasing interest rates and boosting fees to cushion against further losses.

Companies are accelerating interest rate and fee increases ahead of a law, due to take effect in February 2010, that will limit their ability to impose such increases.

(Reporting by Juan Lagorio; editing by John Wallace and Andre Grenon)