--Delinquency and net charge-off rates increased for several
credit-card issuers
--Investors are worried impending fiscal cliff may lead to
higher loan losses
--Discover's shares fell the most since June
(Adds details about Citigroup delinquency and charge-off rates
in 21st paragraph.)
By Andrew R. Johnson
Increasing worries over consumer-loan performance sent
credit-card stocks tumbling Wednesday, with Discover Financial
Services (DFS) leading the group lower as one of the biggest
decliners in the S&P 500.
While the rate of late payments and net charge-offs--loans that
are so far behind lenders don't expect to collect on them--remain
at or near historic lows for many of the biggest banks, recent
upticks have fanned fears that consumers are once again struggling
to pay their bills.
Those concerns have been exacerbated in recent weeks by
discussions over the impending "fiscal cliff," which refers to
government tax increases and spending cuts set to take effect after
the year's end barring Congress's intervention. The fear is the
spending changes could send the U.S. economy back into recession,
drive up unemployment and result in a new wave of loan losses for
lenders.
"If you are worried about the fiscal cliff and you think
GDP...could be negatively impacted by several percentage points,
what you probably don't want to own is a consumer-driven card
issuer," said Donald Fandetti, an analyst who covers
consumer-finance stocks for Citigroup Inc.
However, Mr. Fandetti says he sees no signs that there has been
a fundamental shift in the performance of large credit-card
issuers' portfolios, despite some recent gains in delinquency and
net charge-off rates.
Some of the industry's biggest players on Thursday reported
mostly stable performance for October in monthly reports filed with
the Securities and Exchange Commission, with the exception being
Capital One Financial Corp. (COF).
The McLean, Va.-based lender, which is in the process of
digesting its acquisition of HSBC Holdings PLC (HBC) U.S.
credit-card business, posted results that were weaker than analysts
were expecting. The company's delinquency rate increased to 3.66%
in October from 3.52% in September. Its net charge-off rate was
4.25%, up from 3.93% in the previous month.
"It appears that credit quality is trending slightly worse than
our expectations," Sanjay Sakhrani, an analyst with Keefe, Bruyette
& Woods, wrote in a research note on Capital One's results on
Thursday, though he doesn't view "October's metrics as thesis
changing." Mr. Sakhrani has an outperform rating on the stock.
Capital One's shares closed down 2.4% at $54.77 Thursday.
Shares of Discover Financial Services closed down 4.1% at
$38.34, its worst drop since it closed down 7.2% on June 1.
Despite the decline, Discover had already posted October results
last week that were better than some analysts expected. Its
delinquency rate increased to 1.84% from 1.82% in the previous
month, and its net charge-off rate decreased to 2.01% from 2.19%,
according to a filing pertaining to Discover's loans that are
packaged into securities.
Mr. Fandetti attributed Discover's stock decline to worries that
some investors have about the overall credit-card industry.
Discover Chief Executive David Nelms and other industry
executives have said they expect delinquencies and net charge-offs
to gradually increase in the coming months, given they have
remained at extremely low levels for so long. While losses surged
during the recession, many borrowers became more conservative in
how they use credit cards since then, resulting in a prolonged
period of improvement for lenders.
"I certainly don't think that this is the new long-term
average," Mr. Nelms said Tuesday during a presentation at a Bank of
America Merrill Lynch conference in New York. "I think that at some
point, credit losses will have to normalize back up, and we're
frankly surprised that it hasn't already started to happen."
Whether the fiscal cliff ultimately has a negative impact on
card-issuers' portfolios remains to be seen.
Moody's Investors Service senior analyst Matias Langer wrote in
a recent note that even if President Barack Obama and Congress
"failed to enact legislation to avoid the fiscal cliff, and a
second recession ensued," there would not be a material increase in
Moody's Credit Card Index charge-off rate. The index is based on
asset-backed securities tied to credit-card loans.
"The credit profile of securitized pools today is exceptionally
strong, with sponsors having charged off the accounts of many
weaker borrowers during the credit crisis and recession," Mr.
Langer said. "These remaining borrowers proved resilient through
the Great Recession, and a second recession would not materially
affect their ability to pay down their credit-card balances."
Some large banks reported improvements in their portfolios
Wednesday.
J.P. Morgan Chase & Co. (JPM) said its delinquency rate for
its Chase Issuance Trust declined to 1.94% in October from 1.97% in
September. Its net charge-off rate declined to 3.47% from
3.54%.
Bank of America Corp.'s (BAC) delinquency rate declined to 3.13%
from 3.15%, and its net charge-off rate increased to 4.53% from
4.51%.
Citigroup Inc.'s (C) delinquency rate increased to 2.39% from
2.29%, and its net charge-off rate increased to 4.03% from
3.98%.
The delinquency and net charge-off rates for American Express
Co.'s (AXP) managed-loan portfolio remained flat at 1.3% and 1.9%,
respectively. Its shares closed down slightly at $53.64.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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