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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%.

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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 TheStreet.com 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.

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