Lenders Brace for the Worst
Lenders are increasing their reserves in anticipation of more charge-offs in the coming days, according to analysts quoted by MarketWatch.
Capital One expects charge-offs, known to the financially illiterate as extremely past due balances on credit cards, to reach 5.25%, or between $4.9 and $5.2 billion in 2008.
Discover Financial Services expects charge-offs of around 4.25 to 4.75 percent in 2008, or roughly $2 billion. Citigroup is facing plummeting shares, a leadership shake-up and an all around bleak future.
One can only wonder how much worse the charge-offs situation will be following Black Friday, Cyber Monday and the holiday shopping season. Lenders are insisting their charge-offs are mere precautions and, though unusually high, are still manageable. After all, FY 2001-02 saw many large credit card companies stating charge-off levels of 7% and higher, even up into the double digits. However, analysts see lenders’ current increase of their reserves as a sign that further charge-offs are expected, and may even reach historic highs.
Analysts also believe the problem largely stems to the state of the economy, which is, ironically enough, directly tied in part to the health of financial institutions. It is an enigmatic problem indeed.
