Government ABS Proposal To Have Muted Effect On Card, Auto Fin Cos
17 Giugno 2009 - 10:24PM
Dow Jones News
Credit card issuers and auto finance companies, traditionally
reliant on packaging and selling debt to fund themselves, will see
little change in the way they do business under the Obama
administration's proposal Wednesday to overhaul financial
markets.
Instead, a pending accounting change, slated to kick in at the
beginning of fiscal 2010, is expected to have more teeth for such
card issuers as JPMorgan Chase & Co. (JPM), Capital One
Financial Corp. (COF), Bank of America Corp. (BAC) and American
Express Co. (AXP), and auto finance lenders, such as GMAC LLC and
Ford Motor Credit.
Both the proposed regulatory overhaul and the pending accounting
rule would have the effect of giving consumer lenders more of a
stake in the credit quality of the loans they make.
Consumer finance companies have traditionally raised funds by
bundling pools of consumer debt, such as credit-card and auto
loans, into securities, and selling them to investors in the
asset-backed debt market. Selling these securities gets consumer
loans off the companies' books, freeing up capital they can use to
further their lending activities. Selling has also allowed the
companies to worry less about repayment of the loans.
The centerpiece of the administration's reforms, announced
Wednesday, for the asset-backed market is to have companies - those
who are packing the consumer loans they have extended into debt
securities - retain 5% of the credit risk. The proposal is aimed at
improving the credit quality of the consumer loans by ensuring that
companies have a stake in the loans' performance. That would
address one of the key causes of the credit bust: lax underwriting
standards - a direct result of lenders being able to pass all risk
to investors.
But given the heightened caution on the part of investors, this
is a practice already employed in the industry.
"Today, for the most part, issuers retain interest of more than
5% on their securitization activity," says Scott Valentin, an
analyst at FBR Capital Markets.
Accounting Change
Instead, analysts point to a pending change to an existing
accounting rule, FAS 140, as having a far greater impact on
companies tapping the asset-backed debt market.
The change to FAS 140 will force card issuers and auto lenders
to bring the off-the-books packaged consumer loans onto their
balance sheets -- at a time when losses on these loans are piling
up amid rising unemployment.
For instance, American Express said in its annual report that if
the amended accounting rule goes through, the company would have to
bring onto its books $29 billion of card loans and set aside an
additional $1.8 billion in loss reserves, according to figures as
of Dec. 31. American Express' loss reserves totaled nearly $3.4
billion at the end of 2008.
Citigroup Inc. (C), using figures as of Dec. 31, would have to
take onto its books $98.2 billion of card loans, according to its
annual report. The altered accounting standard will have a
"significant impact" on its financial statements, the company said
in the regulatory filing.
The proposed rule change will force companies to account for the
additional loans on their books by setting aside capital to reserve
for potential losses on these securities. In addition, it may lower
their appetite for risk because the riskier the loans, the more
they will have to hold in reserves.
Proponents of the rule change point to the spectacular losses at
banks that were able to accumulate huge levels of exposure by
housing risky assets in investment vehicles that weren't part of
their balance sheets. One of the biggest blind spots in this credit
crisis was assets held off-balance-sheet.
The revisions to FAS 140 that will force companies to hold
greater reserves will have a "more significant impact" than the
government's proposal Wednesday, says Sanjay Sakhrani, an analyst
at Keefe, Bruyette & Woods. "This is because, prior to the
implementation of the changes to the accounting standard, there was
a capital benefit of utilizing the securitization market, which
gets eliminated with the proposed changes."
Sakhrani adds, "For my coverage universe of credit-card and auto
finance companies, the revision of the accounting standard has a
larger impact." The impact on these companies from the
administration's proposed changes to the asset-backed market is
"relatively muted."
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com