Magazine article American Banker

Projection of Big Card Losses Lets Analysts Say 'Told You So.'

Magazine article American Banker

Projection of Big Card Losses Lets Analysts Say 'Told You So.'

Article excerpt

Some experts were surprised when Advanta Corp. projected a $20 million loss for the quarter, but Gary Gordon was not among them.

For some time Mr. Gordon, a consumer lending analyst at PaineWebber, has stood out on Wall Street as a bad-news bear, warning that overcrowding in the credit card market would make margins shrink and profits disappear.

"My biggest worry, then and still, is the consumer debt rate, which has been rapidly growing since 1993," Mr. Gordon said. "Despite the early signs of losses, consumer lenders in aggregate were trying to grow faster than incomes were, and adding to risk."

Mr. Gordon was not reassured by assertions that the rise in consumer debt was leveling off or that favorable economic conditions would ease the load.

He warned that rising credit risk could swamp all the players. The appearance of problems at one credit card company, he said, would make investors skittish about all the credit card issuers.

Indeed, shares of all the monoline credit card issuers dropped on the news about Advanta, even as some analysts argued that Advanta's problems were unique.

Mr. Gordon said that his biggest worry with Advanta was a marketing push that hinged on a rate to new customers of 5.9% that would jump to 17% after six to twelve months.

"The root of the problem is that so many competitors have entered the market and are offering a superior credit card product, with unsecured debt, lower interest rates and longer amoritization," Mr. Gordon said. "They are stealing the better consumers."

Mr. Gordon noted the about 40% of Advanta's cards carried the teaser rates. He said the overcrowded market allows consumers to easily migrate from one company to another, once teaser rates end; those consumers who have above average proportion of problems stay with their original lender.

When Advanta finally acknowledged that analysts' earnings estimates were too high, it noted that its better customers were no longer borrowing as much, and that a rising number of its customers were filing for bankruptcy. …

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