- NEW YORK (Reuters) - Shares
of credit card firms got hammered on Wednesday after regulators asked issuer
Capital One Financial Corp to increase its loan loss reserves, awakening
fears of a rise in consumer loan defaults.
In further negative news for the sector, Metris Cos. Inc. (NYSE:MXT - News),
a credit card issuer that focuses on customers with poor credit histories,
reported a severe quarterly loss that was far beyond expectations, on
rising default levels. The news pushed its stock down by as much as 45
percent.
"I think (Capital One) has the biggest pull because of its higher
market capitalization," said analyst Matthew Park of the sell-off
in consumer finance stocks. "But in terms of magnitude of news, I
think Metris is worse."
The stocks of credit card issuers and consumer finance companies are extremely
sensitive to any news on the quality of credit, as widespread defaults
by consumers would eat into profits and could lead to huge losses.
Last year, Providian Financial Corp. (NYSE:PVN - News), which like Metris
focused on consumers with patchy credit histories, racked up huge losses
as consumer bankruptcy filings soared during the economic downturn and
debtors discharged credit card debt. Its stock is off about 95 percent
from this time a year ago and closed down 16 percent at $3.39 in Wednesday
trading on the New York Stock Exchange.
Regulators have since kept a more watchful eye on lenders, especially those
with a significant amount of loans to people with troubled credit records,
which is known as the sub-prime market.
On Tuesday, Capital One (NYSE:COF - News) said it had entered into an agreement
with regulators to increase the amount of reserves it would keep to cover
losses. While the company said it already satisfied regulatory requirements,
the stock tumbled 40 percent on fears there would be more bad news down
the road.
WALL STREET DARLING
"It does impose certain uncertainties that need to be availed over
time," Park said.
Capital One traditionally focused on customers with poor credit records,
which still account for about 40 percent of its business, but has since
made a play for a higher income clientele through an aggressive advertising
strategy that includes television commercials.
With its rapid growth it became a darling of Wall Street. In a December
research report Credit Suisse First Boston named the Falls Church, Virgina-based
company as one of its top 20 stocks for 2002.
Its financial results have consistently exceeded Wall Street expectations,
as they did late Tuesday, when it said its second quarter earnings rose
37 percent and it raised its profit forecasts for the year. But the news
was overshadowed by the regulatory concerns.
Salomon Smith Barney analyst Matthew Vetto said in a report that the news
revealed that Capital One was at greater risk for loan defaults than previously
thought. He downgraded the stock to "neutral" from "buy."
Capital One's bonds on Wednesday traded at around 90 to 92 cents on the
dollar, down from Tuesday's close of 97 cents.
"We find it hard to believe (Capital One) can be happy about the idea
of taking marching orders from bureaucrats," fixed-income research
service Gimme Credit said in a report. "We can't view the heightened
level of regulatory scrutiny as a 'good thing' for Capital One, and would
continue to avoid this credit."
Capital One shares closed down $20.12, or 40 percent, at $30.48 in late
day trading on the New York Stock Exchange. Shares of MBNA Corp. (NYSE:KRB
- News), the largest independent credit card issuer, closed off $1.86,
or 9 percent, at $18.50, though MBNA appeals to a higher clientele with
its typical customer having a household income of $70,000 per year. Metris
closed down 37 percent at $4.56.
The credit quality fears also spilled over to affect the broader consumer
finance sector. Household International Inc. (NYSE:HI - News), the No.
2 U.S. consumer finance company, reported quarterly earnings that met
expectations, but saw its shares decline $3.73, or 8 percent, to $42.37.
The company, whose loans are mainly real estate related, also is a big
lender to sub-prime borrowers.
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