US banks hold on to riskier credit-card loans despite losses

Bloomberg

More US consumers are defaulting on their credit cards, but banks may be holding onto the riskiest loans instead of passing them off to investors, according to a report from Barclays Plc.
The credit card loans that banks bundle into bonds and sell to investors are outperforming the loans that lenders have held onto, Barclays analyst Alin Florea wrote in a report.
On average, losses on loans the biggest banks packaged into bonds known as asset-backed securities are 1 percentage point lower than lenders’ broader portfolios. Banks are writing off bad card loans on their books at the highest rate since 2012, and losses are outpacing those for auto and home loans.
The discrepancy may be explained by the more stringent requirements for the quality of loans that banks place into asset-backed securities, Florea wrote. For example, most of the securities require borrowers to have higher minimum credit scores than a bank might demand.
The difference in standards underscores how any future consumer downturn may hit banks more than asset-backed investors. Th-ough losses have been rising for banks and to a lesser extent bonds backed by credit card payments, Barclays isn’t alarmed by the numbers now.
While card losses are growing, they’re still near post-crisis lows and haven’t crimped strong profits in banks’ consumer lending divisions. Part of the deterioration can be explained by a surge of lending in the space, as many banks have prioritised growing their credit card businesses, which can generate the highest interest rates of any form of consumer debt, over other areas like auto lending.