Citi Sees JPM Earnings As Good News For Card Issuers

Better than expected earnings may not have helped JPMorgan (JPM) resist the market�s slide Friday, but Citi analyst Donald Fandetti thinks it bodes well for credit card issuers.

Fandetti� 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.

�Here are further details from his note:�

�”Loan Balances Down To $125.3B � Card balance was $125.3B, down $6.9B q/q (-5.3%). This compares to a -6.4% q/q decline in Q1�11. We think this qtr�s 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 � Spending metrics were healthy. Excluding the impact of Kohl�s (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 qtr�s 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. JPM�s 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 JPM�s merchant acquiring arm (Chase Paymentech), transaction and $ volumes were unchanged q/q at 6.8B and $152.8B. JPM�s 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 � NCO�s 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 � Non-interest expense was flat q/q at $1.64B from $1.63B in the prior qtr, so expense are being kept in check.”