The continuing weak economy is likely to cause credit card issuers this month to report weak payment volume and high charge-off losses with their second-quarter earnings, according to a report recently released by Keefe, Bruyette & Woods. But for some issuers, the smoke surrounding the future is clearing.
Pending new card-industry regulations are putting tremendous pressure on issuers, but "there is now some visibility for issuers on what's needed to be done to remain in the [credit-issuing] business profitably," equity analysts Sanjay Sakhrani and Steven Kwok note in the report.
Assuming an 11% unemployment rate this year and a corresponding increase in charge-offs, top card issuers likely will report depressed earnings for the second quarter and through the remainder of the year, the report predicts. The analysts do not expect issuers to return to "normal" earnings until around 2011.
The analysts believe the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama signed into law in May and places restrictions on card fees and pricing beginning next year, will hurt overall industry profits.
But certain issuers, such as American Express Co., might indirectly benefit from the new regulations if present trends continue and more customers move away from revolving monthly account balances.
With its more "up-market" brand, AmEx, which already charges an annual fee on many of its charge card products, could appear relatively more appealing to customers as more bankcard issuers tack on annual fees to make up lost fee income, the analysts note.