SubscribeWSJ on Credit Card Lenders - Looming Danger
May 20, 2008
It seems that the pot is finally starting to simmer and there is an awakening to the problem that seems so obvious. The WSJ did a good job at looking at both sides of the argument by seems to lean towards the reality of an economy that is standing up to the slowdown on borrowed time and borrowed money.
Heard on the Street - WSJ.com
Since the credit crisis began, investors have expected rising charge-offs — the term given for losses caused by defaults — at credit-card companies. Two big negatives were identified: Job losses and, for many borrowers, a sharply reduced ability to use home-equity loans to pay off more expensive card balances.
Credit did deteriorate. Moody’s Investors Service reports that, for the card lenders it tracks, the annualized charge-off rate — which measures defaults as a percentage of loans outstanding — rose to 6.05% in March from 4.64% a year earlier. The charge-off rate peaked at just over 7% during the 1991 and 2001 recessions, according to Moody’s.
The punchline and final words of Read more
Capital One (COF) - Rising Charge-offs in April
May 15, 2008
Donna Kardos explained the recent monthly report released by Capital One (COF) that provides detail on the position of their outstanding credit and corresponding delinquencies. The original 8k can be found here.
The bottom line is that Capital One is in no way containing their problems. Write-offs approaching half a billion dollars a month is not funny. Shares were bid up recently in a short-cover scare, but that does not take away the fact that there are still major problems. Check out this commentary Read more
American Express (AXP): False Sense of Security?
April 25, 2008
It is no secret that I am no big fan of the bank and financial sector, particularly the consumer credit divisions. The numbers out from American Express Company (NYSE:AXP), show that during Q1 they saw a 6% decrease related to credit card losses and reported a significant increase in total spending and credit usage by customers. So essentially, they are lending more money during a time when they are seeing a higher level of delinquencies and defaults. (Scratching head…)
Bloomberg.com: Worldwide
April 24 (Bloomberg) — American Express Co., the biggest U.S. credit-card lender, reported first-quarter profit that beat analysts’ estimates as income rose overseas. The company climbed more than 4 percent in extended New York trading.
Net income from continuing operations at the New York-based company declined 11 percent to $974 million, or 84 cents a share, American Express said today in a statement. That’s 4 cents better than the average estimate of 17 analysts surveyed by Bloomberg.
American Express, Capital One Financial Corp. and Discover Financial Services shares have dropped more than 25 percent in the past year on concerns rising U.S. unemployment will hurt consumers’ ability to repay debts. The damage at American Express was cushioned by a 30 percent rise in overseas profit to $133 million as customers spent and borrowed more.
The biggest dislocation I see is still in the future outlook as compared to the stock price for many of the constituents within the banking sector. With all of the downgrades along with the fact that we are seeing a historic rise in defaults, what is it that I am not seeing? BEFORE you answer that, whatever you do, don’t tell me that the worst has been priced already as that is not possible. There has got to be something else as there are reports, predictions and further “shoes” to drop from eco-space.
Chart Courtesy of E-Trade: 1 Year AXP:
Capital One - More Bull#*! Analysis
April 11, 2008
Thursday April 10, an article posted by Morningstar’s Ganesh Rathnam discussed some wonderful ways to profit from selling PUT options against the shares of Capital One (COF) as the author believes that the market has it wrong. Remember, the analyst is suggesting a bullish strategy.
Here are the highlights of the analyst’s report and a few comments:
We believe these fears are overblown. Capital One, in our opinion, has all the tools to fight these fires. Ever get notices from your credit card company warning you of a stiff impending rate hike? Well, there’s Capital One’s first tool: its ability to reprice loans almost at will to meet higher credit costs. It can also raise fees and change the minimum required payments on cards so that consumers must pay off their loans faster.
So, Mr. Rathnam, Capital One should just abuse their current customers and demand that they pay for the problems associated with the remainder of the company. Wow, I do not want to be your client! Also, have you noticed that there is pending legislation to stop these types of egregious practices? And one more thing…. kindly see this little item about COF capping fees for cardholder. Maybe you missed this piece that discusses how Capital One is freezing the variable rates on some card and converting them to fixed.
After the acquisition of two banks, North Fork and Hibernia, only 44% of the company’s managed loan portfolio consists of credit card receivables, compared with nearly 100% a few years ago. Additionally, Capital One has a history of writing high-quality loans and managing credit risk. In fact, net charge-offs have trended lower in each of the past four years, declining to 2.88% of managed loans in 2007 from 5.86% in 2003
Charge-offs trending lower? What information are you looking at? The latest report released yesterday shows a 13% increase in charge-offs since December, 2007. Moreover, you should know this: Charge-offs decline during economic expansions. We are in a totally different market condition now. Also, write-offs PEAK just prior to an economic recovery. The latest 8-K reports charge-offs are 4.11% for managed and 5.46% for national lending. (Credit card segment notching up to 6.54%)
Question: Wasn’t 2003 the start of the recover? Isn’t 2008 the beginning of the decline? With respect, I believe you should revisit Eco 101 class. I will not get into the fact that there is a clear uptrend going on. (Chart courtesy of Capital One investor meeting March 2007)
Even accounting for a more diversified loan book, we believe the bank has maintained strict underwriting standards during the credit bubble. Therefore, despite credit cards being unsecured loans, we believe mass defaults are improbable. After all, consumers in financial trouble can walk away from the negative equity in their homes and move into an apartment, letting the mortgage holder take the loss, but they still need to eat and drive to work, and their credit card is their lifeline to that spending. Therefore, they have the perverse incentive of remaining current on their credit card accounts while losing their house.
Defaults improbable? Where is the money common from to pay the bills? How out of touch you are with what is going on down here with us common folk. Give me some cake, please…
In addition, unlike in mortgage securitizations, credit card companies have skin in the game beyond the retention of a small portion of the value of the loans they securitize. Though the credit card companies report financial statements on an “owned” basis–loans and residuals of securitizations retained on the balance sheet–they run their business on a “managed” basis; i.e., they assume that they own all the credit card loans that they originated and pretend the proceeds from securitizations are actually their own debt.
Each card securitization trust has ample credit enhancements such as over-collateralization–for example, $120 of loans backing $100 of obligations–so purchasers of the trust’s notes feel safe and charge lower interest rates to loan money to the credit card company. In exchange, the company gets to keep the excess interest over what these investors charge, but, of course, only after accounting for loans from credit card customers who default on their cards. Therefore, it is in the company’s best interest to maintain underwriting standards because it pays for charge-offs out of its own pocket. These unique aspects of the credit card business–the alignment of incentives between the credit card company and the buyers of the credit card loans–are why the credit card securitization market remains largely unaffected despite the turmoil in other asset-backed securitization markets such as residential mortgages, commercial mortgages, and auto loans
YIKES!!!! That is one of the largest problems… That off-balance sheet item ($49bln) has a default rate of 5.8% where the base portfolio is 3.26%. What are you looking at? Is it possible that the recent 12 months of reports from the company have not made it to your desk? I really do not understand…enlighten me….please!
See more about the 8-K in an article I wrote for AOL Blogging stocks yesterday.
Also see a more details discussion of the Capital One Problem here.
Disclosure: Horowitz & Company clients are SHORT COF as of the publish date.
Double Whammy: Bank-Card Companies are Next
March 24, 2008
Aside from Visa (V) or Mastercard (MA), it doesn’t seem as if the credit card issuers have been getting the attention they deserve. With all of the panic and concern surrounding the brokers and builders, perhaps plates are too full to take on any more. Yet, I have been thinking about how easy credit policies made available for housing created a monstrous economic problem. Even so, it does seems plausible that companies issuing collateralized debt could eventually see a recovery if the underlying property can be liquidated for some portion of its worth. But, what happens as defaults rise on credit/bank card debt, which is only backed by the full faith and credit of the borrower?
During the past few months, investors have pummeled Discover Financial (DFS) and others lenders over fear of rising defaults and delinquencies. Here is an example of the recent news and behavior of credit companies caused by the subprime problems (2/12/08 Washington Post):
The subprime mortgage meltdown has spilled into the credit card industry in other ways. Banks have reported steep write-offs related to the mortgage mess, and their stock prices have plummeted.
“Credit cards historically have been a very profitable segment for the banking industry, so what they’re doing is trying to squeeze customers as much as they can, particularly for accounts they don’t see as profitable or as high risk,” said Curtis Arnold, founder of CardRatings.com, a consumer resource on credit cards.
Bank of America (BAC), for instance, notified some customers last month that their rates would increase as a result of a periodic review of their credit risk. Chase (JPM) last fall increased the rate paid by new customers of its Freedom card. Bank of America and Chase are also among some banks that have increased ATM fees for other banks’ customers to as much as $3. Capital One (COF) has changed its cash-advance fee for new customers from 19 percent to 23 percent.
Beyond the current economic crisis, there is an even more troubling issue confronting the industry with the pending legislation known as H.R. 5244: (MSNBC Consumerman)
‘The Credit Cardholders’ Bill of Rights Act of 2008, known as H.R. 5244, would protect cardholders from arbitrary interest rate increases and unfair fees. Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, is quick to point out that her bill does not have any price controls. It does not cap rates or fees.
Interestingly, it looks as though some analysts are continuing to recommend a BUY rating on COF and other names within the sector and are oblivious to the mountain of problems facing bank card companies, aka: The Double Whammy: (Yahoo/AP)
Amid difficulties with mortgages in the U.S. and unloading corporate debt, banks are competing more than ever for market share in their core business — deposits. A large source of profit, banks are introducing newer, higher-yielding accounts to attract more customers’ cash.
The grease that keeps the wheels turning for these companies is capital. In times when money is easily available, bank-card companies utilize their customer accounts to lend money to the credit card customers. As credit card balances rise, new capital is needed to meet the consumer demand.
In order to bring in fresh capital, brokers such as Lehman (LEH), JP Morgan and Goldman Sachs (GS) raise money through note, bond and stock offerings. What do banks do? Of course if they are publicly traded they have the ability to do the same as the brokers and other companies, yet a quieter and quicker maneuver is the bring in new deposits through higher yielding savings accounts. This also helps to bring up the reserve requirements for loans issued through credit card issues and direct loans.
The simple point shows that as customers continue to look for safer alternatives and margins are squeezed as delinquencies and defaults rise, banks that do a big business within the consumer credit card arena could be hit by both problems of limited capital available to loan and ceilings on the fees they can charge for those loans.
The problem for COF is not restricted to our country. Over the past several years, Capital One move aggressively into England and offered Read more
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