Financial crisis could leave some issuers stronger…
Recently enacted credit card regulations and an ogoing financial crisis has lowered profits and even drove some smaller credit card companies out of business. But it’s not all bad news – some market leaders like JP Morgan Chase, American Express and Discover may end up stronger and healthier, as their smaller rivals and those damaged by subprime loans or dependent on interest income, like Bank of America and CitiGroup, are forced to cut back on credit availability. “They enter this cycle with much better, much healthier loan books than most of their competitors,” said Morningstar Inc analyst Michael Kon.
JPMorgan, AMEX and Discover will benefit from their early decision making. Chase has limited it’s exposure in California and Florida, two states hit by the housing bust and recession, giving breathing room while the economy recovers. Discover has the added benefit of owning its own network, thus not having to pass on profits to Visa or MasterCard.
Bigger challenges may be in the future for Bank of America, Citigroup and Capital One, according to some analyst’s projections. These companies made big profits by flooding consumers with no-fee, preapproved cards with low or zero promotional rates, depending on the ability to increase rates at any time that the account appeared risky. But with the new law, banks will have to be more diligent and picky about who they offer credit to, making subprime borrowers less attractive. In addition, Bank of America and Citigroup’s dependence on federal bailout money — each has taken $45 billion — may keep a lid on any expansion plans. “It is premature at this stage to comment on how the credit card business model will change,” Citigroup said in a statement, “and potential industry adjustments and lenders’ ability to provide access to affordable credit will also depend on how the economy fares.”
Analysts expect credit card losses to peak at 12 – 14% in 2010, pushing annualized industry-wide losses to nearly $100 billion, with profitability not expected until 2011.
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