Credit Card Profits Expected to Fall
Profits expected to suffer for some of the largest issuers…
Credit card companies are taking a big hit from the so-called ‘credit crunch’. Both American Express and Capital One are warning of deteriorating profits in the coming year. Even Chase, which recorded record earnings in 2007, is starting to feel the effects. Up until now, Chase has avoided bad mortgage investments, focusing instead on its commercial and retail banking businesses. But Wednesday, Chase reported a 34% drop in forth quarter earnings from one year ago.
Capital One Financial Corp., the largest independent U.S. credit-card issuer, had forecast a $5 per share profit for 2007. But with increased loan delinquencies the company reported earnings of just $3.97 per share. American Express also expects its profits to be hampered by slower spending and an increase in missed credit card payments. It expects to report fourth-quarter earnings of between $.70 and $.72 per share, lower than 2006.
For Capital One, the ongoing problems are due mostly to the mortgage crisis. The company forecasts $5.9 billion in unpaid loans this year, compared with an earlier forecast of $4.9 billion. Write-offs, or loans the company deemed uncollectible, rose to 4.3% in the fourth quarter from 3.7 % in the third, the company said. It expects they will rise to 5.1% to 5.3% this year. Chief Financial Officer Daniel Henry told analysts in October the company’s “affluent and high-spending” cardholders should shelter the company from the problems associated with risky borrowers and loan write-offs. But that’s yet to be seen…
Chase, on the other hand, has other worries. Although the company wrote down $1.3 billion in mortgages during the fourth quarter, it seems to pale in comparison to Capital One, or Citigroup, which wrote down $18.1 billion. The biggest concern for Chase moving forward is defaults on other credit related products such as auto and home equity loans - and credit cards. The bank said credit costs were up 40% from a year ago, as credit card default rates rose. Subsequently, the company moved $395 million into loan reserves to cover the losses.
“It is clear to us that credit deterioration has moved into the credit card segment, across both the prime and subprime segments,” said Lehman Brothers financial analyst Bruce Harting.
According to American Express, charges on the company’s roughly 84.7 million cards began to tail off in December and more clients failed to repay their debts. The company plans to reserve $440 million for even more expected losses in the coming months. Capital One set aside $1.9 billion for bad loans in the fourth quarter, citing higher losses on U.S. credit card and auto loans, and deterioration in $700 million of home equity lines of credit. More companies are sure to follow suit, and it’s only a matter of time before consumers start to pay.
* See a complete list of American Express, Capital One, Citi and Chase Credit Cards.
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