Credit Card Losses Will Be Meaningfully Higher in Q2

Fitch Ratings believes end-of-quarter delinquency levels, combined with low recovery prospects, signal material deterioration in US credit card losses in the second quarter.

In a special report Credit Cards: Asset Quality Review 1Q09, Fitch discusses current asset quality trends in the credit card market and provides updated growth, asset quality, purchase volume, and profitability statistics for some of the largest credit card issuers.

Recent revisions to unemployment expectations, following the unexpected pace of deterioration in the first quarter, indicate that significant pressure on card credit metrics will remain over the balance of 2009 and into 2010 - Meghan Crowe, Senior Director at Fitch.

Furthermore, net charge-off levels will be hurt by industry portfolio contraction, which will make trends in absolute dollar losses more useful in coming quarters.

Higher portfolio losses combined with lower spend volume and smaller loan portfolios are expected to challenge card segment profitability in 2009 and 2010. Purchase volume dropped an average of 5% sequentially at the top six card issuers in the fourth quarter of 2008, and fell another 14.2% in the first quarter of 2009. These spending trends are expected to continue over the balance of the year. Fitch expects issuers with less dependence on interest spread income, like American Express Company (NYSE: AXP), will fare relatively better from an earnings standpoint.

[ Standard & Poor's downgraded American Express's credit rating to BBB+/A-2 with a negative outlook on April 30.]

“Portfolio contraction is expected to reduce funding needs across the credit card industry in 2009. The Federal Reserve Board launched its Term Asset-Backed Securities Loan Facility (TALF) on March 3, 2009 in the hopes of expanding credit availability. On March 26, 2009, Citibank (NYSE: C) became the first credit card issuer to issue notes eligible for the TALF program, but other large credit card issuers have been noticeably absent from the program, as historically low interest rates continue to make deposits a more attractive funding source. Fitch believes the regulatory capital implications of the SFAS 140 amendment, which will require all off-balance sheet assets to be recorded on balance sheet, may make ABS issuance less attractive for some card issuers going forward.”

Comments

[Victhom:]

Alphin stop this...Bull....it??...... are not healthy...you need more $$$$ for god sakes???

“There are several ways to deal with this,” Mr. Alphin said. “The company is very healthy.”

nytimes.com/2009/0...


U.S. Says Bank of America Needs $33.9 Billion L. ANDREWS
Published: May 5, 2009
The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank, a determination that could make the United States the controlling shareholder in the bank.



Executives sparred with the government over the amount, which is higher than executives believed the bank needed. But J. Steele Alphin, the bank’s chief administrative officer, said Bank of America would have plenty of options to raise the capital on its own before it would have to convert any of taxpayer money into common stock, a move that would effectively increase the government’s holdings in the troubled bank.

“We’re not happy about it because it’s still a big number,” Mr. Alphin said. “We think it should be a bit less at the end of the day.”

Because Bank of America has already received $45 billion in federal assistance from the Treasury in exchange for preferred shares, it could satisfy regulators’ demands simply by converting the non-voting preferred shares to common stock.

Financial markets in Asia slumped 11 percent in early trading as investors questioned whether the results of the government’s stress tests of the nation’s 19 largest banks, whose assets represent about two-thirds of the nation’s financial system, would show more weakness in the financial system than hoped.

The Treasury Department declined to comment on Tuesday evening.

Under the arrangement worked out between the Treasury and Citigroup earlier this year, the Treasury will receive mandatory convertible preferred shares, meaning preferred shares that can be converted to voting shares of common stock at the will of the government.

If Bank of America relied on that conversion for the majority of the capital it needs to maintain, the govnerment wouildj become the nbakjn’s controlling shareholder.

Regulators have told the banks that the common shares would bolster their “tangible common equity,” a measure of capital that places greater emphasis on the resources that a bank has at its disposal than the more traditional measure of “Tier One” capital.

Citigroup, the largest and most deeply troubled of the banks, is expected to need to raise capital as insurance against any further downturn in the economy. The government told the bank it would need $50 to $55 billion in capital, a requirement that would force it to raise $5 billion to $10 billion in new capital, according to people briefed on the final results. Citigroup executives say the bank can easily cover any shortfall, and is considering several options to close that gap.

The Obama administration plans to publicize the results of stress tests on Thursday. The results are expected to reveal that a number of them need additional capital, and many banks have negotiated with the government on what the actual capital requirements should be since they learned of the preliminary findings last week.

The tests are also expected to show that several banks, including Bank of New York Mellon, Goldman Sachs and JPMorgan Chase, are healthy enough to repay TARP funds.

Mr. Alpin noted that the $34 billion figure is well below the $45 billion in capital that the government has already allocated to the bank, although he said the bank has plenty of options to raise the capital on its own.

“There are several ways to deal with this,” Mr. Alphin said. “The company is very healthy.”

Bank executives estimate that the company will generate $30 billion a year in income, once a normal environment returns.

The company has faced criticism over its acquisition of Merrill Lynch, the troubled investment bank, and last week, shareholders voted to strip the bank’s chief executive, Kenneth D. Lewis, of his title as chairman of the board. The board said last week that it still unanimously supports Mr. Lewis in his role as chief executive.

Mr. Alphin said since the government figure is less than the $45 billion provided to Bank of America, the bank will now start looking at ways of repaying the $11 billion difference over time to the government.

In the case of Citigroup, which has also received two taxpayer lifelines, executives say the bank can easily cover any shortfall, and is considering several options to close that gap.

Among them are efforts to accelerate the sales of several businesses within Citi Holdings, a holding tank for assets it plans to shed, or to expand its common stock conversion plans to a broader base of private investors who hold Citigroup preferred stock. Both measures would avoid an increase in the government’s expected 36 percent ownership stake.

Taxpayer-supported Banks have been eager to wean themselves from the government’s purvue, and many analysts have questioned how useful the stress tests will be in assessing their true health.

Also Tuesday, senior government officials said the Treasury Department is planning to require taxpayer-supported banks seeking to free themselves from the government’s grip to show that they can repay the lifelines without additional subsidies that have helped them survive the financial crisis.

Banks have had an indirect subsidy adopted by the government last fall that allows them to issue debt cheaply with the backing of the Federal Deposit Insurance Corporation. The Treasury is expected to announce as early as Wednesday that healthier banks must show that they can issue debt without the guarantees before they are allowed to exit the Troubled Asset Relief Program, or TARP.

The banks also must demonstrate that they will be able to sell stock to private investors and pass a government stress test to show that they are healthy enough to survive without the taxpayer aid.

The Obama administration plans to publicize the results of stress tests for the nation’s 19 largest banks on Thursday. The results are expected to reveal that some need additional capital.

May 06 12:41 AM