Just in time for Christmas - the credit card crunch.
Or at least that’s what some analysts are warning. Arch bank slayer Meredith Whitney says the market can expect up to £2tn of available liquidity to be taken away from consumers over the near-term. That detraction will likely be implemented irrespective of individual consumers’ ability to service debt, but rather according to wider risk estimations like geographical location etc.
So is the Oppenheimer analyst right?The indicators are certainly mounting up. Yesterday, American Express sought to convert itself into a bank holding no less, so as to access Fed support.
The Federal Reserve Board on Monday announced its approval of the applications and notices under sections 3 and 4 of the Bank Holding Company Act by American Express Company and American Express Travel Related Services Company, Inc., both of New York, New York, to become bank holding companies on conversion of American Express Centurion Bank, Salt Lake City, Utah, to a bank, and to retain certain nonbanking subsidiaries, including American Express Bank, FSB, Salt Lake City, Utah.
According to the Fed the credit card group has some $127bn in consolidated assets and only $7.2bn in retail deposits. They pulled the conversion off quicker than usual on account of what they cited were “unusual and exigent circumstances affecting the financial markets.”
As Bloomberg notes the card company was increasingly struggling to finance itself via its usual bond sales due to repayment shortfalls. But the problems are no surprise, American Express has been struggling for at least four straight quarters.
Conversely, the opposite is true of Visa. It was only at the end of October the world’s largest credit card network posted higher-than-expected adjusted quarterly income. Visa, of course uses a different model. Unlike Amex it’s a payment processor. Earnings have doubled as strapped cash consumers increasingly depend on credit cards to get them through the monthly pay-cycle.
But where is that spending going? Certainly not on electrical goods. Falling credit card sales were one of the factors attributed to the fall of Circuit City yesterday, suggesting that while processing fees may be up, Americans are clearly not using that extra credit on discretionary spending. Indeed Circuit City CFO Bruce Besanko saw it like so:
“Over the past several months, consumers have been unable to borrow funds through credit cards, let alone home equity loans, to purchase household and other electronics products.”
Meanwhile in the UK, just when consumers need access to cheap credit most the Telegraph reports credit card companies are imposing higher fees:
Since May, the average annual percentage rate for credit cards has climbed from 17.2 to 17.6 per cent, according to a study of 240 credit cards by the banking research group Defaqto.
The NatWest credit card has risen from 13.9 per cent to 16.9 per cent, while HSBC’s credit card and the Virgin Money Mastercard have both climbed one percentage point to the
same mark.All of which brings us to JP Morgan’s dire short-term view on its retail banking and credit card business filed over the weekend. The bank warned provisions for credit losses in the consumer division “could increase substantially” in the coming months. The FT notes this from the filing:
In the first nine months of the year, JPMorgan set aside $11.5bn - three times more than the same period in 2007 - to cover potential losses arising from its consumer loan portfolio.
JPMorgan warned that charge-offs - the percentage of loans that cannot be recovered - are expected to rise in the last three months of 2008 and the early part of 2009 in both its mortgage and credit card businesses.
The bank said its card business was expected to be particularly hit over the next few months, with charge-offs rising to as much as 7 per cent by the end of the year. The figure could be higher due to the inclusion of the card portfolio of Washington Mutual, the regional lender recently acquired by JPMorgan.
With banks suffering defaults, upping charges or withdrawing credit lines to compensate - things are certainly not looking up for Christmas spending. No doubt sales this Black Friday (November 28th) - the day retailers traditionally swing into the black - will be of greater interest than usual as a result.
