Credit Card Squeeze?

In August, Fortune Magazine ran a great article, which discussed the next credit crunch. In it, Geoff Colvin hinted at what could be a difficult time for credit card companies. Some of this information sets up a broad backstory as to why one might short the likes of Capital One (COF), American Express (AXP), Discover Financial (DFS), or even banks like Citigroup (C) who have large credit card businesses.

I agree with the overall theme of this article and truly believe that the strapped consumer is going to be facing larger headwinds than anyone anticipates (which I partly touched on here). Credit card debt is piling up for the average American, and many are having a very hard time paying it off. This simple concept was illustrated in a nice graph I posted earlier, showing how delinquencies are rising. Capital One (COF) is the perfect example of a company being impacted by this. It has been piling up each quarter and their most recent earnings/conference call gave us a further glimpse, as noted by Forbes' Melinda Peer, who wrote the following about Capital One in  "Capital One's September Slump:"

Credit card and banking company Capital One (COF) said its net charge-off rate, or measure of soured loans, for its U.S. card business jumped to 6.34% in September, from 5.96% in August. Internationally, charge-offs rose to a rate of 5.87%, from 5.31%, in the same period.

Delinquencies, considered signs of troubled accounts, were also on the rise in the U.S. and abroad during September. Domestically the McLean, Va.-based company's 30-day delinquency rate inched up to 4.20%, from 4.07%, in August, and internationally the rate inched up to 5.24%, from 5.15%.

Calculated Risk also took the liberty of transcribing key comments from the conference call, which you can read here. The company is taking positive steps to reduce credit lines and try to limit their risk. However, the company still won't be able to protect itself completely from the impending tsunami.

Additionally, this Wall Street Journal article seems to imply that credit card companies and banks are going to face historic headwinds in the credit card arena. Overall, I truly believe this is going to be an over-arching theme that stems from the current crisis as things continue to bleed over to Main Street. The ultimate question becomes how much of this is already priced into banking and credit card equities, if at all.

Disclosure: None

Comments

[dobuy:]

Wait until US consumers go to the grocery store and their credit cards dont work, even the ones that are not at/past their credit limit....... This will be much more pronounced and significant to the US consumer. A bunch of large, overleveraged Investment Banks losing billions each doesnt matter to the average Joe; not being able to put food on the table, thats where it hurts!

2008 Nov 06 08:06 AM

[Market Folly:]

dobuy,

exactly. deleveraging across all avenues will continue to occur, and that includes an already debt-ridden consumer.

2008 Nov 06 09:45 AM

[Responsibility:]

Is deeply debt-ridden being irresponsible like addiction to gambling or alcohol or drug. Or should it be regarded as stealing?

Is promoting minimum card payment like luring underage people to gamble or drink?

2008 Nov 06 10:15 AM

[Responsibility:]

Is deeply debt-ridden being irresponsible like addiction to gambling or alcohol or drug, or should it be regarded as stealing?

Is promoting minimum card payment like luring underage people to gamble or drink?

2008 Nov 06 10:16 AM

[kurt walter:]

If you want a big tax loss go long any credit card company right now.

2008 Nov 07 10:59 AM

[biff2:]

just curious how much of a hit AXP will take once the street figures that card holders have been unable to pay their AmEx bills via the Amex website for at least 10 days now....it must affect the incoming cask flow for the comapny???

2008 Nov 10 02:32 PM

[Barakobama:]

This article is written by a person without anybrain, and simply has no clue about credit card businesses.

credit card business is still very profitable. I don't understand why people are so scared about higher charge-offs. Card issuers can simply passed along higher costs of doing business to merchants and cardholders thru interchanges and interest rates and fees.

For example, say in 2007, card charge-off rate was 4%, and now it's 8%. So what? all you need to do stay as profitable as last year is doing nothing, since fed lower the cost of funding by 4%,

let's next year the charge-off rates skyrocket to 12%, card issuer can stay as profitable as this year by hiking interchanges to merchant by 1%, and raise rates on cardholders by 2%.

Unlike mortgage, rates are locked on 30 years fixed.

2008 Nov 10 04:40 PM