Credit card losses increase alongside worsening economic trends - analysts

SAN FRANCISCO, Jun 18, 2008 (Thomson Financial via COMTEX) -- BAC | Quote | Chart | News | PowerRating -- Credit card losses are likely to rise in the next 12 months as weakened consumers face worsening broad economic conditions, analysts said.

Among banks, Citigroup Inc., Bank of America Corp. and J.P. Morgan Chase & Co. have the greatest exposure to credit card and unsecured loans, each more than 20%, UBS Investment Research said Monday.

Goldman Sachs analyst Richard Ramsden said Tuesday that credit across the board will continue to deteriorate through 2009, driven by falling home prices. Credit costs have increased markedly for all banks during the current cycle, with non-performing assets rising 30% (on a non-annualized basis) in the most recent quarter, Ramsden wrote in a note to clients.

Credit card losses in the U.S. will rise to 6.15% in 2008 and 6.60% in 2009, assuming unemployment rises to 6.4% by the end of 2009 and bankruptcy filings continue to normalize, and will peak at 6.81% in the second half of next year, he said.

Losses were 4.7% in 2007.

Friedman, Billings, Ramsey echoed that view but called a broad credit rebound in 2009 "optimistic." Analyst Scott Valentin said tumbling home prices, rising unemployment, rising food and fuel costs and the reduced availability of credit lay behind the steady deterioration in consumer credit quality over recent quarters and will continue to impact consumers.

"We expect credit card lenders' losses to increase meaningfully from current levels as delinquencies and defaults increase to levels more consistent with those of a recession," he said.

The credit card industry has experienced unsustainably low losses in recent years because consumers have been able to tap into home equity lines of credit to pay off balances and because the 2005 change in bankruptcy law pushed many losses into a single quarter, Valentin said.

Now, consumers are feeling financial pressure "from both income and balance sheet perspectives," he said. Credit card issuers are going to feel the effects of relatively lax underwriting standards during the economic boom and an increasingly strapped consumer.

"At no time in the history of this country has the consumer ever had so much personal leverage, whether measured by the debt-to-service ratio, the financial obligations ratio, or the household debt-to-equity ratio. Additionally, inflationary pressures on non-discretionary goods are having a meaningful impact on the consumer's ability to meet debt obligations," he wrote.

Card issuers that are more dependent on spending to earn revenue will suffer disproportionately, he said.

While the tax rebate checks mailed this spring boosted some consumer credit card companies in May, they aren't likely to help consumer credit performance in the longer term, Valentin said.

Even prime consumers are feeling "marked stress," he wrote in a separate note about American Express Co.

Valentin reiterated an underperform rating for American Express shares. Credit deterioration will be worse than most investors expect in the second half of this year, leaving further downside, he wrote. The company experienced little short-term impact from rebate checks because its customers tend to have higher incomes, he said.

He sees earnings below the consensus view at the company, estimating per-share profits of 80 cents in the second quarter, 76 cents in the third-quarter and 69 cents in the fourth quarter. The mean estimates of analysts polled by Thomson Reuters were 84 cents a share in the second quarter, 82 cents in the third quarter and 84 cents in the fourth quarter.

Valentin also recommended investors sell AmeriCredit Corp., Advanta Corp. and Capital One Financial Corp.

Meanwhile, FBR sees problems with consumer credit spreading to the commercial arena.

"[T]he contrails of a consumer (or consumer-related) recession have yet to be seen fully in commercial credit," analyst James Abbott wrote in a note to clients Tuesday. "It is this next leg down in commercial credit deterioration that prevents us from becoming more bullish on banks and business development companies ... at current valuations."

Shares of American Express were trading down 3.3% at $43.23.

AmeriCredit stock dropped 2.9% to $11.81, Advanta shares fell 2.8% to $7.28 and Capital One Financial stock lost 2.5% to trade at $44.50.

Bank of America stock slipped 2.6% to $29.53 and J.P. Morgan stock lost 1.5% to trade at $39.36.

Citigroup shares rose 5 cents to $20.88.

Brigid Gaffikin bg/pc

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