Outlook Dims on Credit


More analysts are becoming increasingly pessimistic toward the consumer credit industry.

Howard Shapiro, an analyst at Fox Pitt Kelton Cochran Caronia Waller, on Monday downgraded his outlook for the specialty finance sector to market weight from overweight, and Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, cut his buy-equivalent rating on American Express(AXP) to market perform. Both cited mounting problems in consumer credit, including the inability of some people to pay off balances and the unwillingness of others to add to them.

After examining recent data from several major consumer credit card issuers including delinquency trends, utilization rates and payment trends, "card credit has definitely inflected and we are seeing all the signs of distressed consumer behavior signaling a change in the economic climate," Shapiro wrote in a note. "This includes lower cure rates, higher utilization rates, lower payment rates and the like. The trajectory of losses in the industry going forward will depend highly on the U.S. unemployment rate."

Borrowers are letting their overall balances build up -- another sign of consumer distress -- and those who are already delinquent are unable to "bring themselves current," he writes.

The card trends are worse in areas hard hit by the housing downturn, Shapiro suggests.

Separately, Sakhrani writes in a note that shares of New York-based American Express will "remain volatile" in the near term, due to deteriorating credit quality, slower spending trends and weaker earnings growth.

The card and travel services company took a $438 million provision in the fourth quarter to guard against rising loan losses.

Shapiro's concerns echo that of UBS analyst Eric Wasserstrom.

Last week, Wasserstrom slapped sell ratings on American Express, Capital One Financial(COF) and Discover Financial Services(DFS). Fears of an impending U.S. consumer-led recession this year and rising unemployment sparked Wasserstrom to lower his outlook on the consumer credit companies.

Credit card growth is likely to remain low, "given high levels of consumer leverage and the potential impact from additional government rebates," Wasserstrom wrote in a note. "Hence we expect higher losses, limited balance sheet growth, and lower margins to result in lower earnings through 2008-09."

Credit losses will be particularly painful at American Express due to its "aggressive" growth in receivables over the past two to three years, "which likely reflected a degree of loosening underwriting standards at the trough of the credit cycle," he writes. Still, American Express remains Wasserstrom's preferred stock of the group.

MasterCard(MA), on the other hand, has received high praise from analysts. The credit card payment processing company, which does not hold consumer loans on its books, has not been affected so far by the mortgage meltdown and ensuing consumer-led economic downturn.

Last week, Stifel Nicolaus analyst Chris Brendler raised his rating on the Purchase, N.Y.-based company to buy from hold. Brendler is "less concerned about recession risk" at MasterCard "than consensus appears to be forecasting." He believes that, "should a global slowdown materialize," the company "is prepared to dial back on discretionary expenses." He also pointed to MasterCard's strong fourth-quarter earnings.

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