Better than expected earnings may not have helped JPMorgan (JPM) resist the marketÂs slide Friday, but Citi analyst Donald Fandetti thinks it bodes well for credit card issuers.
FandettiÂ notes that the quarter reinforced his view that the sectors stands to benefit from healthy fundamentals. As one of the largest bank card issuers in the U.S., with $125 billion outstanding, JPMorgan positive trends bode well for the industry. The report showed that the year-over-year growth rate of card spending was moving up, and second quarter charge-offs are expected to improve.
Â Here are further details from his note:Â
Â ”Loan Balances Down To $125.3B Â Card balance was $125.3B, down $6.9B q/q (-5.3%). This compares to a -6.4% q/q decline in Q1Â11. We think this qtrÂs portfolio decline follows their normal seasonal pattern of holiday spend pay down, plus WaMu run-off. Net revenue yield for cards was 12.22%, down a hair from 12.26% last qtr.
Spending Steady Â Spending metrics were healthy. Excluding the impact of KohlÂs (sold $3.7B portfolio on April 1, 2011 to COF) and commercial cards, sales volume increased to $87B, up +15 y/y. This is slightly better than the prior two qtrÂs at 14% y/y growth. However, this qtr JPM is now including WaMu spend versus excluding it last qtr, so not a perfect comparison but WaMu should have had little impact. JPMÂs slightly improving y/y spend growth is better than the moderation suggested in credit card dollar volumes from recent First Data SpendTrend stats (see Figure 2). And at JPMÂs merchant acquiring arm (Chase Paymentech), transaction and $ volumes were unchanged q/q at 6.8B and $152.8B. JPMÂs spend appears to be a solid read through for the networks Visa (V), MasterCard (MA) and American Express (AXP), but remember that JPM is gaining share which boosts their spend numbers.
Credit Â NCOÂs improved 11 bps q/q to 4.4% and delinquencies improved 25 bps to 2.56%, slightly better than their previous guidance of ~4.5%. Looking forward, guidance for Q2 NCO is ~4.25%, meaning credit continues to improve. Credit card allowance was $6.251B, down from $6.999B implying a ~$748 mm reserve release (in excess of the $529M Q4 release). This trend is similar to DFS that reported a better q/q card release for Q1 and suggest other issuers could have upside from more releasing.
Expenses Â Non-interest expense was flat q/q at $1.64B from $1.63B in the prior qtr, so expense are being kept in check.”