Card-card issuers told to tighten up lending as defaults rise

By J. Sturgeon | Financial Post | Feb. 4, 2009

Credit-card issuers are being advised to run regular credit checks, reduce limits on certain cardholders and even close inactive accounts after a report yesterday said delinquencies are on the rise.

Unpaid credit-card bills have been piling up since the financial crisis morphed into recession in the fall, a new report from accounting giant Deloitte says, putting as much at $800-million in jeopardy of being written off.

Households have glutted themselves on debt for the past half-decade, increasing total credit-card liabilities by 40% to $80-billion. As the jobless rate climbed and income generation began to grind to a halt late last year, delinquent accounts jumped by 5% to 10%, said the report's authors.

Now, the spectre of a wave of delinquencies hangs over issuers' balance sheets.

"Canadian consumer debt levels are higher then they were in previous cycles," said banking analyst Robert Sedran of National Bank Financial, adding that he has forecast loss rates to climb higher in 2009.

Historically, Canadian credit-card issuers which include the chartered banks, credit unions, U. S. subsidiaries such as Amex Bank of Canada and big retailers, absorb losses of about 4% annually, the report said.

Yet the delinquency rate has increased by between 50 and 100 basis points since October, with the likelihood that losses will grow, said Mr. Sedran.

Canadian Imperial Bank of Commerce, for example, has already witnessed its loss rate climb above 5% last quarter, the analyst said.

"Where they get to, that's the big question for the year."

The advice Deloitte gives issuers looking to preserve their balance sheets include more credit checks, the ending of automatic account increases and, in some cases, reducing limits or eliminating accounts "where there has been a deterioration in the credit score."

The report also advises institutions to establish a "watch-list" on accounts with "unusually high" use of cash advances.

"Circumstances for cardholders are changing quickly," said Pat Daley, partner at Deloitte and one of the report's authors. "Customers who had impeccable credit scores six months ago may be in trouble today."

Some of the more than 23 issuers in Canada have already moved to tighten standards.

Canadian Tire Corp. said this week it was raising the general interest rate on late payments from its retail cardholders

to 19.5% from 18.99%, annualized. Toronto-Dominion Bank changed agreement terms at the beginning of December, raising rates to almost 25% on overdue accounts.

The report follows measures outlined in last week's federal budget to kick-start the flow of credit back to cash-strapped consumers, including easing pressure on indebted cardholders. Jim Flaherty, the Minister of Finance, said the budget would enhance disclosure requirements on banks and institutions that offer credit cards to help determine costs, revenues and profit margins on services, information institutions are not compelled to divulge under current legislation.

Critics have charged that the proposals specific to credit-card issuers are just too vague.

National Bank's Mr. Sedran said he has not received any tangible guidance that banks are implementing more stringent measures yet, but said he expects them to in the near future.

"You tend to relax some of your lending standards when the economy is performing well and you tend to tighten them when the economy isn't performing well because obviously the risks are rising."