This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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, 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. 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 - Get Report) 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 [above]. American Express recently made that statement because conditions are clearly worse than most lenders expected at this time, and management needed to warn investors that loan losses could look worse than what might already be built into models.

Much talk this year has centered on the relatively safe haven that MasterCard(MA - Get Report) and the newly public Visa(V - Get Report) have provided to investors throughout the credit crisis. Why is that?

We agree with the "safe haven" comments regarding Visa and MasterCard. One misconception regarding these names is that they're "credit card companies." These are not credit card companies, in that they don't issue cards, maintain consumer relationships or make loans. They are purely payment networks -- basically tech companies. Their only significant mission in life is to provide the electronic pipeline for a payment to travel between the merchant point of sale and the issuing bank. Therefore, MasterCard and Visa are in the ideal position to take advantage of the secular shift from paper to electronic forms of payment, which continues unabated despite U.S. economic weakness. Basically, the more times a consumer uses a card for a payment, the more money these companies earn. Additionally, while U.S.-based companies, Visa and MasterCard, are global in every sense of the word, and while the U.S. remains their largest market, they both have achieved significant global diversification.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AXP $65.43 0.00%
DFS $56.27 0.00%
MA $96.99 0.00%
V $77.24 0.00%
AAPL $93.74 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs