As one subprime lender, NextCard ( NXCD), had its online banking operation shut down by regulators, another credit card issuer, Providian Financial ( PVN), saw its stock soar Friday as investors determined that the company wouldn't go out of business in the near future. NextCard's banking arm, NextBank, was shuttered Thursday night by the Office of the Comptroller of the Currency. The OCC said the firm's "unsafe and unsound" practices were likely to deplete substantially all of the bank's capital. NextCard attempted, but failed, to turn the operation around. As a result, the Federal Deposit Insurance Corp. has been appointed the receiver of the bank, which had assets of $700 million and total deposits of $550 million. Providian, meanwhile, said banking regulators approved its own capital improvement plan. And while NextCard's shares were halted at 14 cents, Providian was up 77 cents, or 22.3%, to $4.23. NextBank's closing, which doesn't entirely come as a surprise, wasn't reverberating throughout the sector, probably because Providian's announcement couldn't have come at a better time. Credit card lender Metris ( MXT) rose 7% to $14.36, auto lender AmeriCredit ( ACF) gained 8% to $21.62, and mobile home lender Conseco ( CNC) added 1% to $3.26. Credit card issuer Capital One ( COF) was up 2% to 47.10. Providian and NextCard both watched their market capitalizations evaporate last year as the subprime lending business -- the practice of lending to high- risk clients at higher interest rates -- collapsed amid a weak economy, mounting job losses and tougher regulations. Providian's stock lost 94% of its value in 2001. NextCard is down 74% just since the start of 2002, and the stock fell to 52 cents from $8 last year. As the case of NextCard illustrates, investors continue to face a potential minefield in the subprime lending sector. Even though Providian's news spurred a buying frenzy of that company's stock, some analysts aren't convinced the firms that make a living with high-risk loans are standing on solid ground.
The development at NextCard wasn't surprising to those following the story. In October, the OCC asked NextBank to exit certain businesses, boost loan-loss reserves and reclassify fraud losses as loan losses. The bank, which then became "significantly undercapitalized," put itself up for sale. But with no buyers, NextCard notified regulators that it wasn't possible to prepare and submit a capital restoration plan. The bank also said liquidating its assets wouldn't raise enough money to retire all of the existing and anticipated liabilities. "The bank failed to identify the extent of its credit quality problem or to implement effective corrective measures," the OCC said in a statement.
Argentina and Everything After
For its part, Providian reported a big loss for the latest quarter, but investors didn't seem to care now that the company has a reprieve. "Prior to yesterday's announcement, people had assumed Providian would go the same way NextCard has," said Joel Houck, an analyst at AG Edwards. "In fact the exact opposite has happened." Houck, who has a hold rating on Providian's stock, said that before the company reached an agreement with regulators, "there was about a 50% chance that the company would go bankrupt. Now the chance of that happening is much lower. They can now focus their attention on the business, rather than liquidity management." That said, he noted that risks remain, along with concerns the company won't be able to turn the business around and make a profit. Gimme Credit analyst Kathy Shanley wrote in a report that the company offered "dismal" results Thursday night and that Providian's management continued to avoid questions on a conference call. "We understand why PVN management would want to duck questions," she wrote. "The net loss for the quarter was $481 million, which included about $1 billion in charges to boost reserves and cover various loan losses." Among the charges was a $133 million write-off related to a bank Providian bought in Argentina just last March, which some analysts said symbolizes the company's whole approach to taking risks. Argentina, of course, has been forced to default on billions of dollars of debt, devalue its currency and struggle with political instability and uncertainty for weeks. A host of financial services companies with exposure to Argentina, including J.P. Morgan ( JPM) and FleetBoston ( FBF), saw the country's financial fiasco lead to big charges in their latest quarterly results.
The fact that Providian's plan has been approved by regulators isn't as encouraging as it appears, Shanley wrote, because federal bank officials wouldn't want a major bank to fail on their watch. "It's in their interest to work with the bank to mitigate potential loss exposure," she added. Providian ended the year with total capital of $2 billion and reserves for loan losses and uncollectible finance charges and fees of $2.4 billion, but the company warned of a significant increase in future net credit losses. As part of an effort to right the ship, Providian is cutting jobs and shedding parts of its credit card portfolio. The company recently agreed to sell accounts with $8.2 billion of receivables to J.P. Morgan. "Though the on-balance sheet allowance for losses totaled a fortress-like 16.8% by year-end, we cannot be sure, even now, that PVN's reserves are adequate," Shanley wrote in her report. Those concerns didn't phase Merrill Lynch analyst Michael Hughes, who issued a buy rating on the stock Friday. Hughes wrote in a research note that the approved capital plan paves the path for a recovery. "We consider it likely the company will survive, the balance sheet and funding are in better shape than we would have thought, and we believe the company will be nicely profitable once the current restructuring is over, which will probably take several more quarters," he wrote. Meanwhile, Charlotte Chamberlain, an analyst at Jefferies, maintained her sell recommendation, saying that analysts aren't in a position to know how adequate reserves are. While she doesn't expect regulators to close down the company, she believes they may force a sale, which could potentially wipe out shareholder equity. "There could be another charge-off, and we just don't know how strong the bounce-back in the economy or their customers' financial situations are going to be," she said. "There's not a whole lot of point of catching a falling knife."