Credit Card Charges Hit Bank of America and Citi in Second Quarter

With credit card charge-offs that more than doubling from a year ago, Bank of America (NYSE: BAC) Monday reported net income of $3.41 billion, or 72 cents a share, for the second quarter, down from a record $5.76 billion, or $1.21 a share in the second quarter of last year.

B of A earnings came out one business day following Citigroup earnings last Friday and continued a string of better than expected earnings, or less than expected losses, that started last Monday with Well Fargo’s earnings.

In Bank of America’s case, the financial services company reported that its consumer credit quality continued to weaken. Total consumer credit card net losses rose to $2.75 billion, or 5.96 percent of average managed receivables, up from $2.1 billion — 5 percent of average managed receivables — in the comparable year ago period.

Total net charge-offs of loans and leases rose to $3.6 billion, or 1.67 percent of loans and leases outstanding, compared to $1.45 billion, or 0.81 percent of loans and leases outstanding, in the year ago period.

In its earnings release, B of A reported: “Credit quality continues to weaken, particularly in markets that experienced the most significant home price declines. The slowing economy resulted in credit deterioration concentrated in the domestic consumer, small business and homebuilder portfolios.”

Non-performing assets were $9.75 billion, or 1.13 of total loans, leases and foreclosed properties, compared with $2.39 billion or 0.32 percent, for the comparable year ago period.

It was a similar story at Citigroup (NYSE: C), though the rest of the financial services provider’s business was not robust enough to pull the entire firm out of a loss for the quarter.

Citi reported that its credit costs of $7.2 billion consisted primarily of $4.4 billion in net credit losses and a $2.5 billion net charge to increase loan loss reserves. Net credit losses increased $2.4 billion, primarily driven by residential real estate lending in North America and the firm’s global credit card business.

The global cards business benefited from a $170 million pre-tax gain on a portfolio sale and from increased card spending on consumer necessities, such and gas and food, though that increased spending was offset somewhat by a decline in discretionary spending.

In North America, credit costs increased $345 million, driven by higher net credit losses, up 51 percent, and a $111 million incremental net charge to increase loan loss reserves. According to Citi, higher credit costs reflected a weakening of leading credit indicators, trends in the macro-economic environment, including the housing market downturn, higher fuel costs, rising unemployment trends, and higher bankruptcy filings, as well as the continued acceleration in the rate at which delinquent customers advanced to write-off. The managed net credit loss ratio increased 202 basis points to 6.53 percent.