Magazine article American Banker

Issuers Vary in Outlooks on Quality

Magazine article American Banker

Issuers Vary in Outlooks on Quality

Article excerpt

Byline: Harry Terris

After two quarters of heavy deterioration, top card issuers gave divergent views this month about where credit quality is headed.

In conference calls to discuss second-quarter results, American Express Co. and Citigroup Inc. acknowledged uncertainty. Capital One Financial Corp. and JPMorgan Chase & Co. stuck to previous forecasts of continued weakening in coming quarters. And though their outlooks worsened slightly, Washington Mutual Inc. identified signs of stabilization and Bank of America Corp. said it could see a light at the end of the tunnel.

The worsening of chargeoff rates accelerated in the second quarter for several issuers but slowed for Capital One and Wamu. Reserve-building was a common theme. Wamu, whose absolute chargeoff rates dwarf those of the other big issuers, turned away from the securitization market, saying balance-sheet funding was cheaper. By contrast, Capital One took advantage of what it saw as improved liquidity in the asset-backed market.

States with sharp drops in home prices continued to be the source of the largest problems, and issuers also cited drags on spending and loan portfolio growth stemming from consumer weakness.

Amex withdrew its forecast for profit growth, saying it experienced a sudden deterioration in performance in June, a shock that echoed a similar worsening in spending and chargeoff trends in December.

Despite a more rapid deterioration in B of A's chargeoff rate than in the first quarter, its executives sounded a relatively confident note, predicting a possible turn in the credit cycle in the first half of next year.

Chief executive Kenneth Lewis said: "While we could be wrong, our analysis indicates continued economic sluggishness through the rest of 2008 resulting in some further deterioration in credit quality. But we see eventual stabilization later this year and a start of recovery in the first half of 2009, albeit at a slow pace."

Joe Price, B of A's chief financial officer, said the company still considers 5% to 5.5% its "normalized" range for consumer card losses, and it still thinks that "under recessionary conditions" its losses would exceed that range by no more than 100 basis points.

States like California, Florida, Nevada, and Arizona, where house prices are falling sharply, remain a disproportionate source of credit problems for the card business, Mr. Price said, "while other states have actually shown some declines" in such problems.

The card loan credit outlook Capital One described last week was roughly in line with the one it gave in April.

It said it expects the chargeoff rate to remain in the low 6% range this quarter, but increase to about 7% in the fourth quarter. CEO Richard Fairbank ascribed the expected deterioration to seasonal factors, continued economic weakening, and minimum-payment requirements that Capital One had to adopt when it switched to a national bank charter on March 1.

Capital One's card-loss provision fell 1.8% from the previous quarter, to $1.1 billion, but net income from the card business dropped 30.7%, to $340.4 million, as its net interest margin fell 119 basis points, to 9%.

CFO Gary Perlin said one factor behind the quarter-over-quarter compression was that a temporary boost to the company's net interest margin in the first quarter as a result of rate cuts "reversed in the second quarter as the variable-rate card assets repriced lower, catching up to our funding costs."

Mr. Fairbank said, "Our continued caution on loan growth will result in loan balances that are flat to slightly down in 2008."

Mr. Perlin said Capital One took advantage of improved market liquidity last quarter by issuing $2.6 billion of securities backed by card receivables. The company's securitization plan for this year is now "largely" complete, he said, though "we may ... issue modest additional asset-backed funding if circumstances warrant. …

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