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.