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Banks Hoard Cash as Credit Card Defaults Rise
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Credit card debt is especially worrisome for banks because it is not backed by real assets, such as home mortgages and auto loans. But that has meant credit card issuers routinely have been more cautious.
Nancy Bush, who runs independent firm NAB Research, said it was unclear whether the government's announcement this week that it will invest up to $250 billion in banks to stabilize balance sheets and spur lending will make much of a difference in the consumer market.
"The people with a lot debt who need the money are not going to get it. Is the Treasury now trying to encourage lending to these same sort of substandard customers?" Bush asked.
In reporting sharply lower profits for his company earlier this month, Bank of America chief executive Kenneth Lewis called lending conditions "a damn disaster." Lewis added, "We are making every good loan we can find," but "it's not going to be pretty for awhile."
At J.P. Morgan Chase, the percentage of loans going bad was only a part of the gloomy picture in its quarterly earnings report yesterday. The bank said profit dropped 84 percent, to $527 million (11 cents per share) from $3.4 billion (97 cents) a year earlier. Revenue fell to $14.7 billion from $16.1 billion. J.P. Morgan, the nation's largest bank by market capitalization, acquired struggling Washington Mutual last month.
Wells Fargo, based in San Francisco, yesterday said it was boosting its reserves by $500 million to cover losses, to total $8 billion. Wells Fargo said it made a third-quarter profit of $1.6 billion, down 25 percent from the year earlier. The bank has weathered the economic downturn well so far and has announced that it is buying Charlotte-based Wachovia Corp., which was brought low by the mortgage crisis.
The stock market, in what was an overall rout of shares, walloped J.P. Morgan and Capital One but left Wells Fargo untouched. J.P. Morgan shares fell $2.22, or 5.45 percent, to $38.49. Capital One fell $6.71, or 15.1 percent, to $37.76. Wells Fargo fell 17 cents, or 0.51 percent, to $33.35.
