Card Cos.' 3Q Seen Solid, But '02 Views Matters Most
By TARA SIEGEL BERNARD
Of DOW JONES NEWSWIRES
NEW YORK -- Americans are spending less and defaulting on their loans more frequently - but that won't stop most credit-card issuers from generating healthy third-quarter profits.
Not that it matters. What will matter are any clues Wall Street analysts and investors can glean that might suggest how well these companies will weather a situation most haven't ever witnessed: recession.
"One of the great unanswered questions surrounding the credit card stocks has been how earnings would perform during a recession, because none of them have been public" during such a period, said analyst Michael Freudenstein of J.P. Morgan Securities, "The answer is likely right around the corner."
Since terrorist attacks destroyed the World Trade Center on Sept. 11, consumer confidence has plunged, economic activity stalled, and corporations, largely airlines, have reportedly slashed nearly 250,000 jobs. As unemployment rises - a 5.6% unemployment rate is expected next year by the economists at J.P. Morgan compared with 4.9% now - credit card companies losses typically rise as well.
"The events of Sept. 11 will exacerbate a pre-existing condition which involves pressure on growth and credit quality across the consumer finance" industry, said Prudential Securities analyst Brad Ball.
But for the third-quarter, results are likely to include solid but decelerating loan growth, higher delinquencies (past due accounts), and an improvement in net interest margins thanks to the nine interest rates cuts this year which have lowered companies' cost of funding loans.
The collection of some recurring income, though not a material amount, will be deferred since many card-issuers have decided to go easy on customers in the wake of the attacks. Many companies are forgiving late fees and extending grace periods, amid the air travel and mail delivery problems, not to mention the personal and financial losses for many of the victims' families.
Already Hit Hard
While most companies show signs of fraying, much damage has already been done at American Express Co. (AXP). Before the attacks, the travel and financial services giant misjudged how risky its junk bond portfolio was - a stumble that resulted into two charges, the latest which caused second-quarter earnings to drop 76%. It also said it would cut up to 5,000 jobs that quarter - given the slowing economy - in addition to the 1,600 cuts earlier in the year. While the company, whose headquarters are just across the street from the World Trade Center, had said it was on track to meet the consensus estimate of 38 cents a share prior to the attacks, it now expects to fall short. It hasn't by how much.
The temporary curtailment of travel in the U.S., the likelihood of reduced corporate and consumer travel volume for the near term, and lower corporate and consumer spending, all contributed to the shortfall. Lower financial product sales volume and assets under management will also chip at results, given the temporary halt in securities trading and the slumping markets. The company will also have costs tied to leasing and equipping new office space for up to 5,000 employees. The consensus estimate of 19 analysts now anticipates profits of 31 cents a share, down from 54 cents earned last year and higher than the 13 cents posted in the preceding second quarter, according to Thomson Financial/First Call.
Providian Corp. (PVN), of San Francisco, has also had its share of financial woes. On Sept. 4, it said 2001 profits would fall short of expectations as customer purchases and loan growth softened. It was the third time this year the San Francisco credit-card issuer, which targets higher-risk borrowers, tweaked its earnings forecast. Providian now expects earnings between $3.20 and $3.25 a diluted share for 2001, with earnings of 82 cents to 84 cents in the third-quarter. The consensus estimate of 24 analysts expects third-quarter earnings will come in at 81 cents, compared with 68 cents a share in the year-ago quarter and 79 cents in the preceding second-quarter.
The day after Providian's earnings warning, MBNA Corp. (KRB) attempted to dilute any concern that might be having similar problems. The Wilmington, Del., company said at the time that its "fundamentals are strong ... as will be demonstrated in our third quarter report." MBNA is expected to earn 52 cents a share, up from 43 cents both in the year-ago and prior second-quarter.
Capital One Financial Corp. (COF), Falls Church, Va., is expected earn 75 cents a share, up from 58 cents last year and 70 cents in the second quarter. Analysts expect healthy receivables and account growth, as well as a modest expansion in the net interest margin, but an uptick in uncollectible credits.
Household International Inc. (HI), Prospect Heights, Ill., is relatively insulated from the prevailing credit problems because 40% of its portfolio is backed by residential real-estate. The company is also benefitting from demand for its core product, debt-consolidation, home-equity loans. Household is anticipated earnings $1.07 a share, up from 94 cents last year and 93 cents in the preceding second-quarter.
-By Tara Siegel Bernard, Dow Jones Newswires; 201-938-5288; tara.siegel@dowjones.com |
