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TheStreet Open House

Ballooning Balances Deflate Metris

Shares of subprime lender Metris (MXT - Get Report) slumped Monday after a filing showed that its customers took out bigger loans in 2001 and that greater charge-offs will require it to set aside additional cash.

"Investors are worried that the risk profile is higher than they thought," said Salomon Smith Barney analyst Matt Vetto. "Combine that with the stock having had a pretty significant upward move," and you get a selloff, he said.

Shares of Metris, which makes loans to consumers who have shaky credit histories, were lately falling $4.97, or 20.1%, to $19.73. The stock began its dip last Tuesday but is still up some 60% from a low of $12.35 hit on Jan. 29.

Wachovia Securities analyst Meredith Whitney cut her 2002 and 2003 earnings estimates on the company Monday, "based on a higher charge-off scenario and potential liquidity strains revealed by the company's 10-K filing," as well as the higher cardholder balances. Whitney cut her 2002 earnings-per-share estimate to $2.40 from $3.05, and her 2003 estimate to $2.70 from $3.45. Metris earned $2.62 a share in 2001 on revenue of $2.445 billion.

According to the report, filed with the Securities and Exchange Commission on Friday, more of Metris' loan dollars were concentrated in fewer accounts with larger credit limits in 2001. Loans outstanding to customers with credit limits of more than $10,000 increased by $3.47 billion last year, while loans outstanding to customers with credit limits of less than $10,000 fell by $840 million.

Wrong Direction

"This is atypical of other lenders serving the subprime/moderate-income credit spectrums of the credit card market," wrote William Ryan of Ventana Capital in a report in which he reiterated his sell rating on the company. "Metris has dramatically increased its risk profile to its existing customers and has potentially overexposed itself. It is also not a typical practice to balloon credit limits in an economic downturn."

Metris customers also used more of the loan money available to them in 2001. Customers with credit limits of more than $10,000 used 43.6% of the funds available to them last year vs. 22% in 2000. Those with outstanding loans over $10,000 now account for 15% of the company's portfolio vs. 2.5% a year ago.

The lender's filing also revealed that charge-offs were above company expectations in 2001, forcing it to deposit $21.3 million in its master trust to restore required levels of collateral.

Less Patience

In the fourth quarter, Metris changed its bad-loan accounting. It now recognizes certain past-due loans as a loss after 120 days of nonpayment, down from its original 180 days. The shift meant annualized bad-loan losses, or charge-offs, were equivalent to 11.8% of average loans in the fourth quarter instead of 10.9%.

"The company's 10-K revealed that charge-offs were above company's expectations," causing a spread measure in a 1997 securitization to fall below a trigger, according to Wachovia analyst Whitney. "As a result, Metris was required to deposit $21.3 million in its master trust to restore required levels of collateral."

Matt Vetto says he expects credit quality to continue to deteriorate for the subprime lending group over the next couple of quarters, though he didn't lower his earnings estimates for Metris after the Friday filing.

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