MORE BANKING TROUBLE?

Mortgage meltdown seen spreading to credit cards
Analysts point to new round of charge-offs expected by major U.S. issuers
By Murray Coleman, MarketWatch
Last Update: 5:03 PM ET Nov 19, 2007
SAN FRANCISCO (MarketWatch) -- As shares of Citigroup Inc. tumbled on Monday, analysts pointed to signs that the mortgage meltdown could be spreading to the banking giant and other major credit card players.
"We're starting to see signs within the industry that credit quality is dropping," said Justin McHenry, research director at market tracker IndexCreditCards.com. "That's causing major credit card companies to at least consider taking out larger reserves to protect themselves against more people defaulting in the future."
In downgrading Citigroup (C
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C) , Goldman Sachs analyst William Tanona raised issues related to an ongoing search for a new chief executive and expectations of more write-downs related to mortgage lending. See related story.
But he also forecast an erosion in Citigroup's credit card business. Tanona says he foresees "deteriorating consumer credit trends and higher corresponding provisions and charge-offs" for the company in the future.
Such views come on the heels of at least two key credit issuers revising expectations for coming quarters.
'We're starting to see signs...that credit quality is dropping. That's causing major credit card companies to at least consider taking out larger reserves to protect themselves against more people defaulting in the future.'
— Justin McHenry, IndexCreditCards.com
On Nov. 6, Capital One Financial Corp. (COF
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COF) said that it expects charge-off rates to reach around 5.25% in the fourth quarter. That would imply that as much as $1.2 billion of its U.S. credit card portfolio could require some sort of provisions to stem short-term credit-related setbacks.
"Charge-offs are the amount that consumers have charged on their credit cards but haven't paid off," said Julie Rakes, a Capital One spokeswoman.
Typically, lenders will take charges on credit cards that are past 180 days or so overdue. Those charges go against reserves set aside for uncollected balances, among other possible uses.
Rising delinquencies, usually considered 30 days or more overdue, spur credit card issuers to usually at least consider raising reserves.
And that's definitely starting to happen, say McHenry and other analysts say.
But they warn that determining the extent credit card issuers will be hit by macroeconomic trends and falling mortgages remains difficult to state at this point.
"If we see more credit card companies raise reserve levels," said McHenry, "then that will be a fairly definitive sign about eroding credit conditions in this industry. But it's a very fluid situation right now."
More charge-offs seen
Peter Schnall, Capital One's chief risk officer, says that he now expects 2008 charge-offs of around $4.9 billion.
"We based that view on the delinquency trends we saw at the time and limited speculation about the future course of the economy," he said at Capital One's annual investor conference in early November.
In a presentation on Nov. 14 at a banking conference, Capital One's Chief Executive Rich Fairbank reiterated previous guidance.
"Delinquencies have been relatively flat, although over the last four months they have increased," he said.
Much of that rise can be traced to a changing mix in the firm's credit portfolio, Fairbank added. "But there is some component of the delinquency increase that appears to have its roots in the economy," he said.
CIBC World Markets says it now projects credit losses at Capital One to reach $5.2 billion next year, which would be in line with upper ranges given by management this month.
Meredith Whitney, a CIBC analyst, also has raised her estimates on the firm's credit losses in 2009 to $5.4 billion.
"The increase is driven by prolonged, higher credit card delinquencies and further deterioration in the housing market," she wrote on Nov. 7.
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DFS) also says it now expects charge-offs in 2008 to range between 4.25% to 4.75%. That could result essentially in write-offs to the firm of around $2 billion next year, estimates Mike Taiano, an analyst at Sandler O'Neill & Partners.
Still, such charge-offs wouldn't come close to levels seen in 2001-02. In that period, several large credit card companies reported close to 7% rates. And some engaged in more risky credit markets soared into double-digits as a percentage of outstanding payments.
"If you look at those numbers, charge-off rates are still pretty low from a historical view," said Taiano. "But the signs we're seeing of more charge-offs could be creating an earnings headwind for the industry."
Credit card receivables aren't growing a lot for the industry as a whole, he added. "Coupled with the fact that their losses are expected to go up in coming quarters, credit card companies could be facing a significant impact going forward on their earnings," Taiano said.
Capital One and Discover emphasized that any rise in delinquencies come after historically low levels in recent years.
"Credit card issuers are arguing their charge-offs are simply precautions and represent still manageable levels," said analyst McHenry. "But it's worth noting that they're taking out larger reserves in anticipation that more people could default on their credit card payments."
Murray Coleman is a reporter for MarketWatch in San Francisco