Credit Card Issuers Challenged

Fitch Ratings said on Wednesday that it expects U.S. credit card issuers to remain challenged with respect to their earnings over the near term as a result of soaring unemployment, bankruptcies and losses.

Major credit card issuers continue to face severe losses as the U.S. unemployment rate jumped over 10%. In Oct 2009, the unemployment rate increased 40 basis points (bps) to touch 10.2%. Also, as it is expected that the rate will remain above 10% through 2010, consumers will increasingly fall behind on payments. As a result, the losses of the credit card issuers could worsen further.

Fitch’s rating outlooks remain negative on some of the less diversified credit card companies which are at risk of a downgrade over the next one to two years. These companies are Capital One Financial Corporation (COF - Analyst Report), American Express Company (AXP - Analyst Report) and Discover Financial Services (DFS - Analyst Report).

Though Capital One Financial and American Express reported decent results in the third quarter of 2009, purchase volumes were down 13.7% annually for the top six card issuers.

According to the rating agency, prime credit card delinquencies of 60 days or more increased 16 bps to 4.22% in October. Though the credit card loss rates moderated and early-stage delinquencies decreased from second-quarter peak levels, the agency expects higher loss rates in 2010.

The agency is also evaluating the long-term impact of the Credit Card Accountability, Responsibility and Disclosure law signed in May 2009 to protect consumers from sudden rate hikes, hidden fees and other deceptive practices. This law could have a significant negative impact on the credit card issuers' earnings.

At the same time, consumers are gradually shifting away from credit cards to debit cards for their everyday payments to avoid fees and hazards. Therefore, the credit card companies have little room for improvement until a sustainable recovery of the economy.

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