During the financial crisis, banks turned conservative and slashed credit card lines, closed accounts and wrote off bad loans. Delinquencies promptly fell. Then they kept falling and falling and falling.

Credit cards could be one of the few bright spots in an otherwise rough second quarter for big banks. This Friday JPMorgan Chase & Co and Wells Fargo & Co's will post their earnings reports, beginning earnings season for banks.

With lower credit card delinquencies, banks can dip into money previously set aside to cover bad loans, helping second quarter profit. In a quarter where banks suffered from low rates and still-tepid loan demand, banks need all the help they can get.

For the six biggest U.S. credit card lenders, including JPMorgan Chase, Bank of America Corp, and Citigroup Inc the average delinquency rate is down to 2.35 percent from more than 6 percent in early 2009, according to Barclays Capital.

For a long time, credit card delinquencies correlated roughly with unemployment, which was 8.2 percent in June according to a report on Friday. That relationship has broken down in recent years.

In normal credit cycles, lenders would respond to improving credit performance by courting new customers and making more loans. But banks are reluctant to pursue consumers with weaker credit now. The economy is barely growing, and new rules make it harder to levy fees on delinquent borrowers to make up for the higher risk of losses.

With credit relatively tight, delinquencies keep dropping. Discover Financial Services, which posted results in June because its fiscal quarter ends in May, said its delinquency rate for credit card accounts dropped to 1.91 percent in the most recent quarter, from 2.22 percent three months earlier and from a high of 5.6 percent in November 2009.

"Credit performance continues to be exceptional, but we continue to expect that we must be at, or near, the bottom," CEO David Nelms told analysts.

Nine months ago Nelms said much the same thing as he told Reuters he did not expect delinquency rates to go lower after reaching what was then a 25-year low of 2.43 percent.

He marveled then that the company's rate of writing-off loans as uncollectible had fallen just below 4 percent for the first time since 2007. In May the charge-off rate was down further, to 2.97 percent.

A BRUISING QUARTER

While credit cards are performing well, and mortgage lending has increased with homeowners refinancing at lower rates, other lines of business were grim for many big banks in the second quarter.

Trading volumes were low and merger and underwriting volume were also weak, weighing on investment banking results. Loan demand remained lukewarm, and rock-bottom interest rates pressuring lending margins.

In addition to JPMorgan Chase and Wells Fargo reporting next week, Citigroup Inc will report Monday, the 16th, and Bank of America Corp will report on the 18th.

JPMorgan is expected to post earnings of $3.25 billion, or 78 cents a share, down from $5.07 billion, or $1.27 a share in the same quarter last year. The bank's results are likely to be hurt by a loss from a trader known as "the London Whale," who made big bets in credit derivatives markets.

MOVING EVER SO SLIGHTLY INTO A GREY AREA

As banks have cut their credit exposure, card balances have fallen by 22.7 percent, or $170.4 billion, since October 2008, according to Equifax Inc.

"With the credit card industry, you had a quick cleansing of the at-risk borrowers," said Mark DeVries, an analyst at Barclays Capital.

The unemployed have lost their cards, and the steadily high jobless rate is not adding to delinquencies and losses for the banks, DeVries said.

Issuers tightened their standards severely in the bust, said Curt Beaudouin, a credit analyst at Moody's Investors Service. "The new accounts that were being added were pristine, super-prime."

Now many banks are looking to make more loans, but they are loosening credit slowly, aiming their marketing programs at people with money to spend and those with only slightly worse-than-prime credit.

"It is very subtle," said analyst Matt Howlett of Macquarie Securities. "It is beginning to reach down ever so slightly into the gray area where you are not prime, but you are not subprime. It is not going to be as dramatic as in other cycles."

It looks like the industry actually went too far in cutting off credit, which is typical in credit cycles, Howlett said. "They probably over-tightened their guidelines and cut-off a lot of borrowers that are good payers," he said.

Now nearly 60 percent of new cards are being issued to prime borrowers, down about 10 percentage points from the strictest periods three years ago, but up from about 42 percent in the lenient periods of 2007, according to Equifax.

Credit standards are being loosened a bit, but instead of pursuing subprime borrowers, banks are focusing more of their efforts on signing up big spenders. Card issuers and processors collect fees from merchants based on how much people spend.

(Editing by David Gregorio)

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