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Credit card issuing will become a smaller and less profitable industry after the implementation of restrictive new laws, but credit cards will pull their weight for remaining issuers, according to industry analysts at Keefe, Bruyette & Woods. "We still believe credit cards will continue to provide one of the most-lucrative returns of the asset classes within banks' portfolios," analysts Sanjay Sakhrani and Steven Kwok wrote in a report released today by the New York-based equity-analysis firm. Those profits will be built upon more-restrictive, less-generous deals for cardholders, the analysts wrote. Acceptance will be less likely for subprime card applicants, and creditworthy cardholders will face lower rewards, higher annual percentage rates and increases in costs such as annual fees and late fees. Initial jobless claims and corresponding card-delinquency rates have slowed from peak levels, but issuers likely will have to suffer through a weak U.S. economy for the rest of 2009, with unemployment at around 11%, Sakhrani and Kwok predicted. "Our view is that normalized earnings are likely to be achieved in 2011 but largely will be driven by reserve releases," they wrote. Lack of growth opportunities in the industry also could drive mergers and acquisitions of issuers and portfolios once banks achieve better capitalization, the analysts wrote. "Generally, the card-issuing business will become a scale-player's industry with potential for certain noninvolved players, mainly on the large- to mid-cap bank side, getting involved" by merging with or buying the portfolios of issuers of a variety of sizes, Sakhrani tells CardLine. Bankcard profit margins declined last year as card spending slowed and credit card loan losses soared, but issuers still made a sizable profit, according to the 2009 Bankcard Profitability Study and Annual Report produced by Cards&Payments, a CardLine sister publication (CardLine, 5/12). U.S. issuers of Visa- and MasterCard-branded consumer cards posted a collective after-tax profit/return on assets of $17.71 billion, or 2.48% of average outstandings. That represents a 2.9% drop from the previous year's collective profit of $18.25 billion, or 2.71% of average receivables.

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