Amex And Cap One Are Healing – US-FOREX.US
Rising unemployment spells trouble for credit card companies. Laid off from their jobs, some borrowers fall behind on their loan payments and companies such as American Express and Capital One Financial eventually consider a portion of their loans uncollectible and write them off. With the jobless rate at 9.7%, loan losses and late payments are expected to drag on earnings for American Express and Capital One when they report their second-quarter results on Thursday. Estimates of loan losses, expressed as an annual net charge-off rate, has followed the rising unemployment rate for months . But investors and research analysts are beginning to wonder if credit card losses have reached their peak. Shares in American Express and Capital One recently jumped after they reported that June loan data looked better than expected. American Express said uncollectible loans dropped to 9.9% at an annual rate in June from 10% in May. Delinquent loans-those 30 days or more past due-dropped to 4.4% from 4.7%. Following the news, analysts at both JPMorgan Chase and Jefferies raised their ratings on American Express. Analysts polled by Thomson Reuters estimate that American Express will report net income of 162 million for the second quarter, or 26 cents a share. That’s a drop from the company’s profit of 56 cents a share in the same quarter last year. Unlike other credit card companies, American Express usually gets 60% to 70% of its revenues from its billing network, taking a fee from a store every time a customer swipes an AmEx card. Because it’s less reliant on lending than, say, Capital One, setting aside more money to cover loan losses doesn’t hurt earnings as much.
American Express is also expected to benefit from a head start at cutting expenses, through layoffs and slashing its marketing budget, and tightening its standards. In a note to clients, Jefferies analysts said the company began reigning in risky customers in the middle of last year; one incentive offered 350 credits to customers to pay down their loan balances.
Capital One is expected to lose 228.9 million, a loss of 73 cents a share, compared with an adjusted 1.21 profit last year. The company recently reported that its uncollectible loans rose at a slower pace in June and that delinquent loans fell. Analysts at JPMorgan credit the announcement for pushing Capital One’s shares higher but caution that the changing rates are likely a result of borrowers cashing tax return checks. In a research note, the analysts said they believe rates for late payments and uncollectible loans will soon resume their climb. They expect Capital One to return to profitability in the second quarter of next year.