Credit-card companies expected to post stable results

0 Comments | Deseret News (Salt Lake City), Jul 11, 2005 | by David Enrich Dow Jones/AP

NEW YORK -- Even as their ranks dwindle, the nation's major independent credit-card companies are expected to post stable second- quarter results.

But June's consolidation wave -- in which Washington Mutual Inc. agreed to acquire Providian Financial Corp. and Bank of America Corp. snapped up MBNA Corp. -- isn't likely to alleviate the broad challenges facing the so-called monoline card companies, which operate independent of banks and other more-diversified financial- services firms.

After years of rapid expansion, the market for credit cards seems to be nearing a saturation point. That presents a major problem for companies whose growth prospects largely hinge on their ability to find new customers and get existing ones to put more purchases on plastic.

As a result, analysts have modest expectations for the second- quarter earnings that American Express Co., Capital One Financial Corp., MBNA and Providian will report in coming weeks.

Recent data showing lackluster growth in receivables -- or consumers' outstanding credit-card debt -- along with pressure on all-important net interest margins have prompted analysts to reduce their second-quarter expectations.

"Everyone's going to struggle on the receivables growth," said Edwin G. Groshans, an analyst with Fox-Pitt Kelton. "Opportunities for organic growth are diminishing."

That's one of the factors that prompted executives at MBNA to warn investors about the company's bleak outlook for the rest of 2005. Another troubling trend for MBNA: Credit quality in Britain recently has plunged. About 19 percent of MBNA's receivables come from British customers, and the deteriorating credit quality may mean more late payments and higher charge-off rates, according to Craig Maurer of Fulcrum Global Partners, which doesn't have investment-banking ties to MBNA.

The two surviving monolines -- American Express and Capital One - - are widely regarded as in stronger shape.

American Express, based in New York, has benefited from its emphasis on high-end customers who continue to spend vigorously.

At Capital One, analysts will be looking to see whether the company's auto-finance business -- which recently has been contributing a fatter slice of Capital One's revenue -- keeps heating up. If so, that could help insulate the McLean, Va., company from some of the card industry's problems.

Aside from fundamental factors, some of the card companies may be able to pull levers this quarter to bolster their earnings.

American Express, for example, noted in its quarterly report in May that it expects to recognize "significant benefits later this year" by resolving government tax audits of past years. The filing didn't elaborate.

Some observers said the disclosure suggests that the company's earnings may enjoy a sizable tax-related boost in one or more quarters this year. "We could be talking about several hundred million dollars," said Robert Willens, a tax and accounting analyst at Lehman Brothers Inc.

Questions about earnings quality "will likely continue to dominate the quarterly assessments," Goldman Sachs analyst Michael S. Hodes wrote in a recent note to clients.

This could be a particular issue at Capital One, whose first- quarter earnings were padded by the release of about $70 million in reserves -- a move that many analysts view as a crutch to help meet Wall Street expectations. In the second quarter, Hodes predicts, Capital One is likely to release about $21 million in reserves, an amount he described as "modest."

Another variable: a federal bankruptcy law that takes effect in October and will make it harder for people to declare bankruptcy. In the second quarter, the result was a 25 percent surge in the number of personal bankruptcy claims as people scrambled to get a fresh start before the new law kicks in, according to Banc of America Securities.

That could take a toll on all of the card companies, which record costly charge-offs when consumers manage to wipe out their credit- card debt. Groshans, the Fox-Pitt analyst, said MBNA and American Express may be especially vulnerable.