Visa Inc (V)

[esmagnus]

Credit Card Issuers Face Bigger Losses Than Expected
Dow Jones

June 27, 2008: 10:54 AM EST

By Aparajita Saha-Bubna and Marshall Eckblad

Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- Investors sold on plastic may want to reduce their balances.

Credit card issuers - ranging from standalone companies such as Discover Financial Services (DFS) and American Express Co. (AXP) to those at banks like Washington Mutual Inc. (WM) and Citigroup Inc. (C) - are likely to suffer worse losses in the coming quarters than initially expected.

Hit by the double-whammy of a growing reliance on credit cards by cash- strapped borrowers and a worsening economic downturn, issuers' earnings should be dented by deeper loss reserves and higher defaults.

New credit card data from Fitch Ratings indicate that losses are hovering around or have exceeded five-year averages and issuers have increased their loss expectations or withdrawn guidance in the face of rising unemployment, record- high gas prices and a housing slump that has yet to bottom.

"The deterioration in credit cards is accelerating faster than many had expected," said Christopher Wolfe, an analyst at Fitch and one of the authors of the report published Friday. "The message we are trying to deliver is that things are going to get worse before they get better. Thus far, credit card businesses have been profitable but that could change."

Fitch analysts are expecting an increase in prime charge-off rates - or losses from defaults on card payments as a percentage of loans outstanding - to at least 7% by the end of the year from 6.4% in May.

Oppenheimer analysts say that according to data from companies covered, borrowers paid back 19.8% of their balance on average in May, down from 20.7% a year earlier. Even as payments fall, credit card debt is rising amid greater joblessness and as declining property values prevent borrowers from using their homes as a piggy bank. The total amount of credit card debt outstanding in April was about $956.9 billion compared to $887.6 billion a year ago, according to Federal Reserve data.

Plastic In Shreds

Discover, which reported fiscal second-quarter results Thursday, had initially estimated net charge-offs in the 4.75%-to-5% range for 2008. The company now expects losses above 5% for the year on its $46.9 billion portfolio of credit card loans and in the mid-5% range by the fourth quarter.

As a result, its provision for loan losses - a critical performance gauge for investors - increased 31% to $582 million in the quarter.

The current environment "calls for continued reserve strengthening," said Roy Guthrie, Discover's chief financial officer, in a conference call to discuss earnings.

While MasterCard Inc. (MA) and Visa Inc. (V) are often mistaken for credit card issuers, they, in fact, specialize in processing credit card payments for banks and have no exposure to credit card loans.

Particularly vulnerable, say analysts, are credit card issuers such as Washington Mutual, or WaMu, and Capital One Financial Corp. (COF) with higher subprime exposure, a category of high-risk borrowers with high delinquency who fueled the mortgage crisis.

WaMu, which bought a subprime credit card issuer in 2005, reported in the first-quarter net charge-offs of 9.32% on $26 billion of credit card loans. This is up from 6.31% a year earlier. It ratcheted up its loss reserves in its credit card unit by more than 60%. A WaMu spokesman declined to comment, citing the so- called quiet period ahead of earnings.

A Capital One spokeswoman wasn't available to comment.

Even American Express, known for its affluent borrower base that is more " upscale," according to Kathleen Shanley, a senior analyst at research firm Gimme Credit, has signaled that it isn't immune. The company warned of worsening credit indicators that have "deteriorated beyond our expectations," in a statement Wednesday.

Credit card issuers that are part of bigger banking institutions such as Citi aren't in the clear either. The financial services behemoth had net losses of 5.83% in its U.S. cards portfolio in the first quarter, a 1.2% rise from a year earlier. "While current losses remain below peak levels, they are running above the long-term average," said Fitch analysts in their report. A Citi spokesman declined to comment on upcoming second-quarter results.

A testament to the dour outlook on this sector is the tepid response the auction of General Electric Co.'s (GE) $30 billion credit card business has fetched. JPMorgan Chase & Co. (JPM) - a large credit card issuer - long viewed as the likely acquirer of the business, recently dropped out of the bidding, according to people familiar with the situation. Other companies with large credit card portfolios, such as Citi and Capital One also aren't expected to submit bids, as a result of rising delinquencies and charge-offs in their own card portfolios, these people said.

"There's no place to hide," said Brian Riley, research director at the Tower Group and an industry veteran. "I have never seen real estate, consumer loans and credit cards take a hit at the same time. Credit card companies are especially vulnerable because they are the last in line to receive payments from customers."

-By Aparajita Saha-Bubna, Dow Jones Newswires; 201-938-2137; aparajita.saha- [e-mail]

-By Marshall Eckblad, Dow Jones Newswires; 201-938-4306; marshall.eckblad@ dowjones.com

(Robin Sidel of The Wall Street Journal contributed to this report.)

(END) Dow Jones Newswires
06-27-08 1054ET
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