Credit Cards: Safe Haven in the Storm?
The slumping housing market and lingering credit crunch have pummeled financial stocks over the past year to lows not seen in almost two decades. Last year, banks were feeling the pinch from writedowns related to securities backed by mortgages and unsold leveraged loans. This year banks are getting socked in the stomach as a consumer-led recession results in the rapid deterioration in credit beyond just residential mortgages -- creeping into other consumer and commercial-related loans, such as credit cards and residential construction loans.
As a broad swath of banks and consumer finance companies begin to report second-quarter earnings results next week, profits -- if any -- will continue to be weak. Banks will be busy continuing to add to their pile of loan loss reserves, marking down leftover leveraged loans and mortgage-backed securities, and shoring up capital wherever they can, likely in the form of dividend cuts.
This week, TheStreet.com asked several high-profile equity analysts about how the credit crisis is affecting banks and other consumer finance businesses. In this third installment, Craig Maurer, an equity research analyst covering specialty finance and payment processing companies at Calyon Securities, weighs in on the big credit card processing firms.
TheStreet.com: As the housing/credit crisis morphs into a full-on economic slowdown, consumer spending is a big concern among Wall Street observers, economists and analysts. How will a slowdown in consumer spending affect the card companies? Maurer: A continued economic slowdown's most pronounced impact on the card companies (the issuers not the networks) would come via two avenues: growing unemployment and tightening credit standards. The problems posed by unemployment on a cardholder's ability to repay his credit card debt should be self-explanatory. Tightening credit standards, which are a direct result of pressures both economic and structural, hurt a consumer's ability to refinance at more advantageous rates, diminishing their ability to keep up with payments. While not necessarily an impact directly related to the slowing economy, rising commodity prices will obviously impact the consumer's availability of free funds to pay down debt. Many analysts are raising concerns about credit card loans as the next problem area. Since you cover several big credit card and processing firms, what trends are you seeing in that area? American Express (AXP) recently said that business conditions are deteriorating faster than expected, why is that? Clearly the credit card companies are showing accelerating loan losses, which seem to be a direct result of the factors mentioned
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV