Trouble in Credit Card Land

Those familiar with the lending industry have known for some time that the health of the credit cards and auto portfolios was in jeopardy due to the deteriorating economy. Furthermore, they know that things will eventually get worse as the unemployment rate increases. Below is proof positive. From Market Watch. Text in bold is my emphasis.

Quarterly results from Capital One Financial suggest the credit card industry faces a tough 2009 as more borrowers struggle to repay debt and cut spending.

Capital One, one of the largest card issuers, reported a $1.4 billion fourth-quarter net loss late Thursday as it set aside another $1 billion to cover higher charge-offs this year.

The fourth-quarter charge-off rate in the U.S. card business was 7.08%, up from 6.13% during the third quarter. That's expected to jump to roughly 8.1% in the first quarter of 2009, up from the mid-7% range Capital One previously forecast.

Credit-card companies are being hit as falling house prices, the financial crisis and surging unemployment limit the ability of some customers to pay back debt racked up on their cards. (Credit card portfolios are most sensitive to the unemployment rate.)

Capital One said it expects the U.S. unemployment rate to reach 8.7% by the end of 2009 from 7.2% currently and that, on average, home prices will fall another 10% this year.

"From a credit perspective, 2009 is literally and figuratively a write-off," Richard Shane, an analyst at Jefferies & Co., wrote in a note to investors on Friday. "We view the entire industry embarking on a path of permanently lower equity returns."

American Express, a leading rival, slipped six cents to close at $16, the lowest level in more than 12 years.

In addition to more bad debt, companies in the industry have struggled to securitize the credit card loans they originate. That's forced them to fund the loans on their balance sheets instead, which requires more provisions up front, Shane explained.

Tighter regulations on the credit card industry are also limiting the strategies issuers usually use to improve returns, he added.

Meanwhile, some borrowers who are still able to pay their credit card bills are now spending less. Growth in Capital One's U.S. Card business was weaker than usual in the fourth quarter because of lackluster holiday spending.

"Revenue opportunities are less than we previously assumed," John Stilmar, an analyst at SunTrust Robinson Humphrey, wrote in a note to clients on Friday. . . . .

. . . . American Express was cut to sell from hold by Stuart Plesser, an analyst and Standard & Poor's Equity Research. He also slashed his target price on the shares to $14 from $20.
"Charge-offs for credit cards have picked up significantly," Plesser said.

"We also note that credit is starting to deteriorate for more credit-worthy customers," he added. That's an area American Express has traditionally focused on.