This Day On The Street
Continue to site right-arrow
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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Banks Brace for Credit Card Pain

Stocks in this article: COF AXP DFS

Click here for larger image.

Credit card banks make higher interest-rate spreads than banks with more varied loan portfolios. Since loan losses are expected to be higher than they are for other lenders, these banks tend to hold much higher levels of capital. To be considered well-capitalized under regulatory guidelines, banks need to maintain leverage ratios of at least 5% and risk-based capital ratios of at least 10%.

Click here for larger image.

Of course, not all of the 10 banks with largest credit card portfolios are pure credit card banks. Citibank NA (a unit of Citigroup (C)), JPMorgan Chase Bank (held by JPMorgan Chase (JPM)), HSBC Bank, USA (a unit of HSBC (HBC) and U.S. Bank (A unit of US Bancorp (USB) have diversified portfolios.

These capital ratios will be higher at the end of the fourth quarter for many of these banks, when capital infusions from TARP are factored in.

Chase Bank USA, Citibank South Dakota, Discover Bank (the main subsidiary of Discover Financial Services (DFS), American Express Centurion and Capital One Bank (USA), all had loan loss reserve ratios that were "behind" the annualized charge-off rate for the third quarter. This means that, assuming charge-off rates hold up or increase over the next few quarters, these banks will need to significantly boost their quarterly provisions for loan loss reserves.

In the case of Discover Bank -- even though its third-quarter charge-off ratio was not among the highest in our group of 10 -- its need for additional reserves would have been expected to have quite a large effect on earnings of parent Discover Financial Services, since the bank represents the bulk of the holding company's assets. However, Discover Financial expects to receive $862 million of its $2.75 billion settlement against Visa (V) and MasterCard (MA) during the fourth quarter.

Discover filed suit in 2004, saying Visa and MasterCard's rules against issuer banks also issuing Discover cards violated federal antitrust laws. Discover expects to collect $472 million in settlement money each quarter during 2009. Now that's fantastic timing. The market apparently agrees, since Discover Financial's shares had a year-to-date total return of -26.96% as of last Friday's close, while the S&P 500 returned -54.71%.

American Express filed a similar suit against Visa and MasterCard, settling for $1.13 billion. The company expects to continue collecting $70 million per quarter through the second quarter of 2011, which will greatly mitigate credit losses. Still, the market has punished the company for its rapid slide in loan quality and (at least temporarily) the bleak prospect for loan securitization, with a year-to-date return of -57.41% at last Friday's close.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.
4 of 4

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

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.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs