The rest of the year is a question mark, but 2004's first half was party time for the card industry's bean counters.
A CCM analysis of second-quarter financial reports from card processors, bank card issuers and other major players shows that the vast majority of firms enjoyed double-digit profit growth in the Jan. 1-June 30 period.
"Credit (quality) is good; interest rates haven't done much yet; balance growth has been kind of lackluster, but profits are strong," says Moshe Orenbuch, a research analyst at Credit Suisse First Boston who follows card issuers and specialty finance companies.
Meanwhile, five of the seven publicly traded card processors that reported quarterly results in July exceeded Wall Street's expectations, according to analyst Gary Prestopino of Chicago-based Barrington Research. The firms can thank your Average Joe for supplying a steady stream of card transactions to process (page 8).
"You really have to look at better than expected spending by the consumer," says Prestopino.
Some first-half highlights:
* Bank One Corp. went out in style with its last financial report as an independent company, posting first-half earnings of $708 million in its Card Services unit, up 34% from the year-earlier period. Bank One merged with J.P. Morgan Chase & Co. on July 1. Combined with Chase's own card business, the merged Bank One/Chase card division is on track to have an annualized $2 billion in card profits.
* Reformed subprime credit card issuer Providian Financial Corp. continued its comeback, with earnings up nearly 300% from 2003's first half on a slightly smaller loan base. Managed receivables fell 3% to $17.2 billion, but Providian's net chargeoff rate dropped more than 400 basis points to 12.53%. Meanwhile, Metris Companies Inc., attempting its own recovery from a near-death subprime experience, reduced its first-half loss to $28.7 million from $107.6 million in 2003.
* Processor-on-steroids First Data Corp., puffed up by its February ingestion of Concord EFS Inc., posted increases of 18% and 47% in first-half revenues and net income, respectively. First Data accounts for half the revenues of the processors tracked CCM.
First Data's Payment Services unit, which includes Western Union, surpassed $1 billion in quarterly revenues for the first time in the second quarter. Bolstered by Concord, FDC's Merchant Services unit reported a 71% increase in quarterly transaction volume. And even the usually laggard Card Issuing Services unit posted an 82% increase in second-quarter operating income. The division, however, will soon lose two major customers-Chase and Bank One-as the merged bank moves its 72 million credit card accounts to Total System Services Inc. (TSYS).
* American Express continued its strong run with nearly $1.4 billion in first-half earnings on higher cardholder spending. And, despite an 8% decline in receivables from mid-2003, Morgan Stanley's Credit Services unit, issuer of the Discover card, posted a 12% increase in pre-tax earnings. Discover eased off on balance-transfer marketing, but spreads widened and charge volume rose in the second quarter.
Card issuers may see further profit growth in the second half because chargeoff rates, though down, haven't yet fully reflected the steeper declines in delinquency rates, usually a harbinger of loss trends. "Delinquency rates are close to 10-year lows," Orenbuch says, adding that he believes increases in short-term interest rates by the Federal Reserve are unlikely to seriously crimp issuers' profits.
Things might not be so rosy for card processors, at least investors in processor stocks. Barrington's Prestopino notes that economic reports in July and early August signaled some weakness in consumer spending, which could translate into less transaction growth.
And even if earnings remain strong, processor stocks are poised for a correction because of big run-ups in share prices and total returns last year and in 2004's first half. "You're giving back some of these gains," he says.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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