Tough Times for Card Companies - Barron's

Like other financial firms, credit card companies have been hit hard by the current economic crisis, but they may not have seen the half of it yet. Barron's Sandra Ward warns credit card firms face tougher conditions than many investors realize.

Consumers are falling behind on monthly payments in growing numbers as unemployment rises. Charge-offs have risen to 6.6% from 4.6% a year ago, and could continue to climb past the historical high of 7.5% and possibly into double-digits. The asset-backed securities market, the industry's prime source of funding, has frozen up. New government regulations put strict curbs on industry practices for raising revenue. As Citigroup analyst Donald Fandetti comments, "we're looking for a pretty material deterioration through 2009."

Another metric to follow is consumer monthly payments as a portion of total balances. Currently, the average for six big card firms is an annualized 16.7%, down from the industry's historical norm around 20%. American Express has the highest payment rate at 21.6%, and Bank of America has the lowest at 13%.

Therefore, despite low valuations, it's prudent for investors to be wary of this group of stocks. Key players include: American Express (AXP), Bank of America (BAC), Citigroup (C), Capital One Financial (COF), Discover Financial Services (DFS) and JPMorgan Chase (JPM). Of the pure-play card issuers, Capital One is best positioned to ride out the storm; its acquisition of Chevy Chase Bank gives it a fresh source of funding.

Comments

[Paul Price:]

The other 'card' companies - traditional greeting cards - have become the latest 'buggy whip' producers.

With e-greetings virtually free and snail mail alm heading towards extinction American Greetings and Hallmark could be joining with the newspaper industry group as modern day producers of antiques.

Sad to see but the new reality when IM-ing and texting are all that the new generations will do.

2008 Dec 28 08:07 AM

[M-P:]

If I recollect from another SA piece, BAC and JPM had over 20% of their revenue come from the CC business, which is definitely material. The revenue streams of many of the banks is in jeopardy in the near to medium term. CC fees are almost pure margin and the charge-offs have been manageable ... I don't see job growth increasing at a fast rate even with a job works program, which will take some time to spool up. Also, the wage delta between the jobs lost and new jobs is likely to be significant - add-in the a higher savings rate and deleveraging and consumer spending should be down by $500B to $1T, if not more. All said, without strong jobs and wage growth, I see the CC issue only becoming worse and bank earnings under serious pressure.

2008 Dec 28 10:08 AM

[warpony:]

Credit card companies have largely brought the misery on themselves. The failure formula is: (1) Issue as many cards as possible, to as many people as possible; (2)Structure an elaborate system (FICO, FAIR) to make credit look bad for as many people as possible; (3) Use this system as an excuse to downgrade credit ratings for high ratio card users; (4) Jack interest rates as high as possible; (5) Whine when people fall behind.

Duh.

I have sterling credit. Yet no sooner did the government bail out Citi than I got a notice that my interest rate was doubling. I opted out, and Citi will no longer have my business.

Best,
Warpony

2008 Dec 28 05:22 PM

[Ishortyou:]

Well APR are rising to hord cash to cover the hole that irresponsable lending have left behind, so that is going to affect the CC market, global recession will contribute to rising defaults and of course charge offs as well. it doesnt look pretty.

2008 Dec 29 10:35 AM

[Kevin Walmsley:]

Warhorse and MP--good comments.

I have a briefcase safe that I call my run-n-gun (it's used to contain a firearm, but no more. But I've kept the moniker). I have important insurance documents, a few thousand dollars cash, birth certs, etc. It's in case my house is burning down or there's a hurricane on the way, and I have time only to grab a couple of things and rebuild my life somewhere else.

Anyhow, I also had two unused credit cards in there, with $10k credit limits. And last month I got letters saying that they had been closed. I thought at first my identity had been stolen or something--I didn't recognize the account numbers, or the banks. Then it occurred to me that they had closed my run-n-gun credit card accounts, just in case I ever got the mind to use them, but at least now they don't have to maintain reserves against that possibility.

Six months ago, they would barrage my mailbox with offers to increase the limits, if only I would use it. Now they apparently feel that if I start buying stuff, I won't pay them back.

Not a good picture. The banks are running scared. Not only are they refusing new loans, they're busy closing up old ones.

2008 Dec 29 04:34 PM

[loghyr:]

Um, Visa and Mastercard and American Express are "card companies". The institutions you refer to are called "banks."

Banks "issue" credit cards and charge interest and have been a pretty bad investment. Credit Card companies process payments and are all pretty solid investments, since they make money in good times and bad.

Mixing the terms is confusing and kind of silly if you are claiming some kind of financial expertise.

2008 Dec 30 03:07 PM