Providian Showing Signs Consumer Settlements Will Hurt Earnings - TheStreet

Providian Showing Signs Consumer Settlements Will Hurt Earnings

The credit-card issuer settles a case centering on its treatment of cardholders.
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Providian Financial


is settling with authorities that have probed the way it charged and treated its customers. But these peace deals have resulted in hefty fines that will hit the company's earnings, and they provide cold comfort to other credit-card companies, which could soon face similar scrutiny from the authorities.

Facing accusations that it financially harmed customers through questionable marketing and sales practices, Providian said Monday it reached a settlement with the Connecticut attorney general. It's also expected to settle soon with the San Francisco district attorney and a Washington-based banks watchdog, the

Office for the Comptroller of the Currency

, both of which had reviewed Providian on similar claims.

Providian, which focuses on borrowers with low creditworthiness, is taking a pretax charge totaling as much as $270 million in the second quarter to cover fines and legal costs resulting from the authorities' probes. The authorities' actions are apparently doing longer-term damage to profits, as they have forced Providian to jettison practices that were bringing in significant amounts of revenue, according to some analysts.

Relief that Providian's legal problems were behind the company lifted the stock for most of Tuesday, but it finished down 9/32, or 0.3%, to close at 93 7/16.

Cover Me

On Monday evening, the office of the Connecticut attorney general, Richard Blumenthal, said Providian had agreed to pay the State of Connecticut $1.6 million to cover legal fees. The company also committed to providing "full restitution to consumers who were financially harmed" and to "change its credit card and marketing practices."

Blumenthal says his office is not considering additional legal action, but added that the settlement "will entail further payments" to fund the restitution. A Providian spokesman said its second-quarter charge was calculated to provide for restitution resulting from the Connecticut settlement.

An agreement with the OCC and the San Francisco district attorney is expected imminently. However, none of the parties involved were commenting on it. The San Francisco authorities and the OCC started their reviews of Providian's practices in the middle of last year, while Connecticut's was initiated in November.

If it reaches an agreement with the OCC, Providian almost certainly protects itself from further actions by state authorities. "It's very likely that a settlement with the OCC will pre-empt other states from doing" probes, says Blumenthal.

In a press release Tuesday, Providian said it was going to offset the legal charge with a gain on the sale of some home equity loans, which, according to finance chief David Petrini, will total around $38 million, or about 26 cents a per share. Including the gain and the legal charge, Providian expects to make 39 cents to 44 cents a share in the second quarter. Excluding these two special items, the company expects to make $1.25 to $1.30 per share, which is in line with the $1.25 expected by analysts surveyed by

First Call/Thomson Financial


Slowdown Crowd?

Some observers believe that profits growth has slowed at Providian because it can no longer use methods the authorities saw as aggressive to gain fee revenue. Probably as a result of an initiative to be softer on customers that was started in the middle of last year, noninterest income, which is mainly made up of fee revenue, is growing more slowly. It advanced only 5.4% in the first quarter from the fourth, notes Kathy Shanley, an analyst at Wilmette, Ill.-based

Gimme Credit

, which doesn't do underwriting. That's well below the 14% average quarter-on-quarter growth for the five quarters that ended in the fourth quarter of 1999.

The firm's expected long-term return on equity is now 30% and its expected earnings-per-share growth rate is now around 25%, according to analysts. That's high, but it's also below the 40%-plus numbers investors have been used to for both measures of profitability.

Some observers expect state enforcement authorities to target other credit-card issuers that cater to the lower-grade borrower.



and, to a lesser degree,

Capital One

(COF) - Get Report

, concentrate on customers with spotty credit histories. Blumenthal says his office has received complaints against other credit-card companies, which he declined to name. He added, however, that he is not preparing legal action against any credit-card companies at this time. (Metris didn't return a call for comment, and Capital One said it knows of no legal action by state or federal authorities against it.)

Still, "I expect we will see similar types of enforcement actions directed at other credit-card issuers," says Andy Sandler, a New York-based partner and head of consumer enforcement litigation at law firm

Skadden Arps