Among Consumer Lenders, Safety Counts

With personal bankruptcies on the rise and more consumers defaulting on their loans, it's become a tough environment for credit card lenders. But as Thomas Weisel analyst Matthew Park points out, not all consumer finance firms are equal.

Although subprime lenders, companies that lend money to people with checkered credit histories, are likely to endure further pressure in the months ahead, Park believes that prime lenders should fare much better. As a result, he raised his investment rating on MBNA Corp.(KRB Quote - Cramer on KRB - Stock Picks) to buy from attractive, and downgraded Household International (HI Quote - Cramer on HI - Stock Picks) to market perform from buy on Monday.

"We suggest the valuation of prime consumer lenders would likely be more resilient to further investor concerns over consumer credit," he said in a research note. "We believe that most of the remaining credit quality issues are in the subprime area."

Household, which caters to high-risk borrowers, stands in contrast to MBNA, whose average customer has an annual income of $70,000 and a 17-year history of paying bills on time.

One of the main reasons that MBNA is expected to do so much better than its rival is that its credit quality is projected to improve significantly in 2003. During the third quarter, MBNA's net credit loss rate, or the percentage of its lending portfolio that is not expected to be repaid, declined to 4.84% from 5.09% in the prior quarter. Park expects this to fall to 4.57% next year.

At Household, net credit loss rates of real estate secured loans, which account for more than 45% of its total managed portfolio, are rising faster than expected, hitting 1.03% in the third quarter, up 17 basis points from the second quarter and 38 basis points from the first.

MBNA is a better investment for other reasons, too, according to Park. The firm's expansion into the U.K. has helped offset domestic weakness in loan growth. In addition, the stock is undervalued, trading at 11.3 times Park's 2003 earnings estimate and 3.1 times book value. Historically, shares have traded at 14.8 times forward earnings and 4.8 times book value.

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