Australians face mounting consumer debt

Reserve Bank of Australia Governor Ian Macfarlane has reason to be concerned about consumer debt.

He had to run a gauntlet of promoters offering him credit cards on the way to his gate at Sydney Airport on a recent trip.

"There are people lining up to give you credit cards," Macfarlane, 60, told a parliamentary committee in February. "The community concern about credit cards is that so many cards are being handed out."

Almost one in 20 Australians, a record proportion, applied for a new credit card in the first quarter. They were drawn by an influx of overseas competitors, including American Express and General Electric, that are waiving fees and cutting interest rates to win market share.

The heightened competition, started by UK billionaire Richard Branson in 2003, threatens to erode earnings at domestic lenders including Commonwealth Bank of Australia. The nation's biggest credit-card issuer and other banks are slashing rates to curb customer defections as HSBC Holdings, HBOS and Citigroup target Australia's market of 20 million spenders.

When Branson's Virgin Group's finance unit introduced an 11.9 per cent card, average rates were around 18 per cent, according to InfoChoice, a Sydney-based consumer information company. Now at least 15 card firms offer rates lower than 11 per cent.

Competition increased further last year when GE offered interest-free terms on debt switched from competitors' accounts, eroding the share of the market held by the nation's banks in March to less than 80 per cent for the first time.

"There's certainly more competition since we entered the market, but we think there's still a fair way we can go," said Tom Gentile, 42, chief executive officer of GE Money in Australia and New Zealand. GE, based in Fairfield, Connecticut, entered Australia's card market in 1995.

Australians applied for a record 959,894 cards during the first quarter, up 27 per cent from a year earlier, according to Baycorp Advantage, a credit reference firm in Sydney.

Credit-card spending totalled A$174 billion ($212 billion) in the 12 months to March, when outstanding debt jumped 14.7 per cent to A$34.7 billion, central bank data shows.

Sydney-based Commonwealth Bank cut interest on its Yellow card by more than a third to 10.99 per cent in March, becoming the last of the nation's banks to slash interest rates.

"It's no secret that we were a bit slow off the block in offering a low-rate card," said Geoff Austin, head of retail products at Commonwealth Bank. "There was clearly a significant segment of the market that wanted one."

The fall in rates would crimp earnings, said Citigroup analyst Craig Williams in Melbourne. He estimated banks' annual profit growth from cards would slow to 7 per cent in 2008 from 18 per cent in the past three years. Australia's banks would earn A$780 million from cards by 2008, up from A$640 million last year, he said.

GE is the world's biggest issuer of store-branded credit cards. Its venture with Coles Myer, Australia's No 2 retailer, offers spenders free flights and discounted petrol.

The plan has attracted more than 1.1 million new accounts since 2003, with holders paying interest on more than A$1 billion of debt. GE has a similar venture with Harvey Norman, Australia's largest furniture and electronics retailer.

"GE has used the Coles Myer platform as a base for a aggressive assault on the Australian market," said Mike Ebstein, director of Melbourne industry research firm MWE Consulting.

The drop in Australian banks' card-market share equalled a shift in outstanding balances of more than A$700 million, or 2 per cent of total card debt, in the past year. Most of that went to GE and American Express, he said.

Melbourne-based Gentile said GE Money had almost 4 million cards outstanding in Australia and New Zealand.

That trails only Commonwealth Bank, which didn't specify how many cards it has. The bank has more than 20 per cent of the domestic market, the leading share, according to the Australian Prudential Regulation Authority, the industry regulator.

With consumer-finance units in 47 nations, GE has spent more than A$2 billion buying Coles Myer's card unit, as well as Westpac Banking Corp's AGC finance unit, Nissan Finance and Avco Finance in Australia and Wizard Mortgage Corp.

Edinburgh-based HBOS offered Australia's cheapest card at 8.99 per cent in January, a rate matched last month by St George Bank, the nation's fifth-biggest lender.

HBOS, the biggest UK mortgage bank, through its Australian unit BankWest, is the fastest-growing of the nation's card issuers, with debt owed on its cards rising 35 per cent to A$432 million last year.

"We see cards as a big opportunity for us here," said Richard Shepherd, head of cards at Perth-based BankWest. "There's still plenty of room for growth."

Shepherd said the low-rate segment accounts for 12 per cent of Australia's card market, compared with about 25 per cent in the US and UK. He expects the size of the market to double in three years. The average outstanding card balance in Australia is A$2715 per person, according to the central bank.

Co-operative Bank in the UK sells a 9.9 per cent card, while Citigroup and Morgan Stanley's Discover unit offer a 10.99 per cent card in the US.

The demand for cards worries Citigroup's Williams. Cards "represent almost the sole source of credit risk in retail banking," he said. "Bad debts remain the single largest threat to profit growth."

- BLOOMBERG