After two quarters of heavy deterioration, top card issuers gave divergent views this month about where credit quality is headed.

In conference calls to discuss second-quarter results, American Express Co. and Citigroup Inc. acknowledged uncertainty. Capital One Financial Corp. and JPMorgan Chase & Co. stuck to previous forecasts of continued weakening in coming quarters. And though their outlooks worsened slightly, Washington Mutual Inc. identified signs of stabilization and Bank of America Corp. said it could see a light at the end of the tunnel.

The worsening of chargeoff rates accelerated in the second quarter for several issuers but slowed for Capital One and Wamu. Reserve-building was a common theme. Wamu, whose absolute chargeoff rates dwarf those of the other big issuers, turned away from the securitization market, saying balance-sheet funding was cheaper. By contrast, Capital One took advantage of what it saw as improved liquidity in the asset-backed market.

States with sharp drops in home prices continued to be the source of the largest problems, and issuers also cited drags on spending and loan portfolio growth stemming from consumer weakness.

Amex withdrew its forecast for profit growth, saying it experienced a sudden deterioration in performance in June, a shock that echoed a similar worsening in spending and chargeoff trends in December.

Despite a more rapid deterioration in B of A's chargeoff rate than in the first quarter, its executives sounded a relatively confident note, predicting a possible turn in the credit cycle in the first half of next year.

Chief executive Kenneth Lewis said: "While we could be wrong, our analysis indicates continued economic sluggishness through the rest of 2008 resulting in some further deterioration in credit quality. But we see eventual stabilization later this year and a start of recovery in the first half of 2009, albeit at a slow pace."

Joe Price, B of A's chief financial officer, said the company still considers 5% to 5.5% its "normalized" range for consumer card losses, and it still thinks that "under recessionary conditions" its losses would exceed that range by no more than 100 basis points.

States like California, Florida, Nevada, and Arizona, where house prices are falling sharply, remain a disproportionate source of credit problems for the card business, Mr. Price said, "while other states have actually shown some declines" in such problems.

The card loan credit outlook Capital One described last week was roughly in line with the one it gave in April.

It said it expects the chargeoff rate to remain in the low 6% range this quarter, but increase to about 7% in the fourth quarter. CEO Richard Fairbank ascribed the expected deterioration to seasonal factors, continued economic weakening, and minimum-payment requirements that Capital One had to adopt when it switched to a national bank charter on March 1.

Capital One's card-loss provision fell 1.8% from the previous quarter, to $1.1 billion, but net income from the card business dropped 30.7%, to $340.4 million, as its net interest margin fell 119 basis points, to 9%.

CFO Gary Perlin said one factor behind the quarter-over-quarter compression was that a temporary boost to the company's net interest margin in the first quarter as a result of rate cuts "reversed in the second quarter as the variable-rate card assets repriced lower, catching up to our funding costs."

Mr. Fairbank said, "Our continued caution on loan growth will result in loan balances that are flat to slightly down in 2008."

Mr. Perlin said Capital One took advantage of improved market liquidity last quarter by issuing $2.6 billion of securities backed by card receivables. The company's securitization plan for this year is now "largely" complete, he said, though "we may … issue modest additional asset-backed funding if circumstances warrant."

By contrast, Wamu said a 45.5% increase in its provision for card loan losses from the previous quarter, to $911 million, was driven in part by "an increase in reported receivables as maturing securitizations resulted in on-balance-sheet funding of new originations."

Wamu's CFO, Thomas Casey, said that "securitization funding costs have increased significantly and we can fund" card receivables "more cheaply on our balance sheet."

Citi's North American card business increased its reserve-building by 6.7%, to $334 million.

Gary Crittenden, Citi's CFO, said the buildup in reserves "reflects recently observed trends which point to an expectation of higher losses in the near term," including falling home prices and rising bankruptcy filings.

Mr. Crittenden again identified private-label cards — which he said produce both higher losses and higher net interest margins, and which make up more than a third of Citi's portfolio — as an important factor in its outlook.

He also reiterated the company's view that its loss rates could peak at levels higher than during previous downturns, in light of its private-label exposure, "the historical correlation of unemployment rates and loss rates, and the typical six- to eight-quarter rise in losses during periods of rising unemployment."

Citi's North American managed receivables increased 0.3% from the previous quarter and 4.1% from a year earlier, to $151.2 billion. The North American private-label portfolio fell 2.3% from the previous quarter but increased 5.8% year over year, to $54.6 billion.

Higher funding costs hurt the results, but "an increase in both nonpromotional and revolving balances" drove a 28-basis-point year-over-year increase in its North American portfolio's net interest margin, Citi said.

Sales volume on its cards in North America was even with the second quarter of 2007 "as higher spending on consumer necessities … was offset by a decline in discretionary spending."

JPMorgan Chase's CFO, Michael Cavanagh, said his company's outlook had not changed much from the forecast it gave in May, and that it expects the chargeoff rate to be 5% or somewhat higher in the second half and "could average 6% in 2009."

Profit from JPMorgan Chase's credit card business fell 58.9% from the previous quarter and 67.1% from a year earlier, to $250 million, because of higher credit costs. The company boosted its reserves for card loan losses by 8.8% from the end of the previous quarter, to $3.7 billion at June 30, after leaving them about flat in the first quarter.

Transaction volume on JPMorgan Chase's cards increased 9.6% from the previous quarter and 6.4% year over year, to $93.6 billion. Noninterest income increased 6.3% from the previous quarter and 0.3% from a year earlier, to $764 million. The company said that "interchange income, … higher revenue from fee-based products, and higher securitization income were offset by increased rewards expense and higher volume-driven payments to partners (both of which are netted against interchange income)."

Mr. Cavanagh said the company anticipates pressure on revenue in terms of spending volume and amount of receivables. But CEO James Dimon said: "We're gaining share in consumer and small-business [cards], albeit obviously sales themselves are down a little bit. So we're continuing to invest in marketing in that business. … We're not going to stop doing that because you have credit losses."

Wamu's card business lost $175 million, compared with profits of $199 million the previous quarter and $133 million a year earlier. John McMurray, its chief risk officer, forecast a 10.5% chargeoff rate this year, compared with the 9.5% to 10.5% range the company forecast in April. CEO Kerry Killinger said, "Card delinquencies will be highly correlated with unemployment … but are also showing signs of stabilization."

Cards distributed through Wamu branches accounted for 35% of 755,301 new accounts during the period, compared with 38% of 666,407 new accounts in the first quarter and 37% of 652,711 in the fourth quarter.

© 2008 American Banker and SourceMedia, Inc. All Rights Reserved.

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