Wall Street Wary of Credit Card Reform’s Impact

Despite a mostly positive group of earnings reports this week from the biggest credit card-issuing companies, forecasts of possible profit trouble ahead as card reform laws take affect are rattling Wall Street. 

Particularly worrisome to investors – which sent shares of American Express and Capital One tumbling Friday – were an analyst’s forecast and comments from executives at American Express and Capital One.

In a note to investors, FBR Capital Markets analyst Scott Valentin projected the card industry will sustain profit losses as issuers tackle high charge-off levels, higher marketing costs and the new reform laws set to take full effect Feb. 22. He said that Capital One could experience the biggest contraction, because of its portfolio of sub-prime borrowers. American Express, traditionally catering to more affluent customers, should be better positioned and less affected, Valentin wrote.

Then there were the comments from the executives themselves. 

“The lack of consumer demand for credit, across our businesses, is striking,” said Capital One Chief Executive Richard Fairbank during the company’s earnings late Thursday.

Fairbank said he sees stagnation in growth under pending restrictions on interest rate increases and penalty fees imposed by the so-called Credit CARD Act. He said the industry may even contract slightly in 2010.

American Express Chief Financial Officer Dan Henry told investors on a conference call that growth would remain slow.

“We expect the global economy to continue to recover gradually, and the resulting environment to be characterized by billings growth that is more modest than we experienced before the recession, as consumers and businesses remain cautious about their spending,” he said.

Capital One – the fifth-largest general purpose credit card issuer – reported a net income for the fourth quarter of  2009 of $375.6 million, or $0.83 per share, compared to a  net loss of $1.45 billion the previous year, which was at the height of the financial crisis.

For all 2009, Capital One’s net income was $319.9 million, or $0.74 per share- including the $563.9 million impact to net income from the repayment of the government’s bailout program. This compares to a loss in 2008 of $78.7 million, or $.21 per share, which included a pre-tax, “goodwill impairment charge” of $810.9 million in the automobile business, in 2008.

Capital One’s credit card unit reported net income in the fourth quarter of $509.9 million, an increase of $218.2 million, or 74.8 percent, from the prior quarter’s net income of $291.7 million.

“Lower provision expense in the quarter was the key driver of the improved profitability,” Capital One reported.

 But Capital One’s managed net charge-off rate for the credit card segment remained essentially flat at 9.58 percent in the fourth quarter of 2009. And its “30-plus days” delinquency rate on credit cards increased 35 basis points to 5.88 percent in the fourth quarter of 2009, from 5.53 percent in the prior quarter.

Capital One’s earnings report yesterday followed that of American Express, the largest credit card issuer in the U.S. by purchases.

AmEx said fourth-quarter profits came in at $716 million, or 60 cents a share, up from $240 million, or 21 cents a share, in the same quarter a year earlier. The earnings performance was buoyed by a significant cut in provisions for loan losses – $748 million, down 47 percent compared to $1.4 billion in the year-ago period. The decline reflected continued improvement in credit quality during the latter part of 2009.

This week, Chase – the top general purpose credit card issuer – also reported strong earnings, with fourth quarter  profits of $3.3 billion, or 74 cents a share, compared with $702 million, or 6 cents a share a year earlier, beating most analysts expectations. But mounting losses on mortgages and credit cards overshadowed the overall profits report, concerning Wall Street investors.

The two other major credit card issuers – Bank of America and Citigroup – releasing earnings this week reported losses primarily tied to their bailout repayments to the government under the Troubled Asset Relief Program, TARP.