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 [...]

(COF) U.S. 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), American Express Company (AXP) and Discover Financial Services (DFS).

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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U.S. stocks surged Monday, with the Dow Jones industrial average storming to its highest level in more than 13 months as finance ministers from the Group of 20 industrialized nations pledged to continue economic stimulus measures to help the global economy.

The Dow Jones industrial average, which was well supported by strength in its all but one component, rose 203 points, or 2.0%, to a 13-month high of 10,227.  The S&P500 climbed 2.2% for its sixth straight session gain to 1093 and the tech-heavy NASDAQ gained 2.0% to close at 2154.  The market’s measure of volatility, the CBOE Vix, plunged 4.3% to 23.15.

All ten S&P500 industry groups ended in the green, led by gains in basic material shares (+3.5%) and financials (+3.5%).  Crude prices added $2.00 to close at $79.43 even as Hurricane Ida was downgraded to a tropical storm.  Gold prices went past the $1100 level, up $5.70 to $1101.40, as the metal shined brightly on its inflation hedge appeal.  At the same time, greenback took a beating on such concerns, declining 1.0% against a basket of currencies, to a 15-month intraday low of 75.04.  Shares of Freeport-McMoRan (NYSE:FCX) advanced 4.6%; Rio Tinto (NYSE:RTP) surged 5.9%.

A weak dollar helped shares of companies with large exposure to overseas markets.  Caterpillar (NYSE:CAT) jumped 4.2%, DuPont (NYSE:DD) gained 3.7%, Boeing (NYSE:BA) rose 3.4%, and General Electric (NYSE:GE) added 3.4%.

Financials rose 3.5% with American Express (NYSE:AXP) jumping 4.9%, Bank of America (NYSE:BAC) up 4.8%, Discover Financial Services (NYSE:DFS) up 5.9% and Capital One Financial (NYSE:COF) up 5.6%.  The Fed noted that of the ten bank holding companies that underwent US government’s stress tests only GMAC has raised its capital reserves sufficiently to meet the economic risks of higher unemployment and slowing growth. On Thursday, the FDIC meets to address the negative implications of an accounting rule change requiring credit-card firms to bring back on to their books card loans that are bundled into securities and sold to investors.

While the economic calendar remains light and corporate earnings schedule slim, Fed speak schedule is heavy, with Atlanta Fed President Lockhart slated to take the stage at 9:15 ET; San Francisco President Yellen at 10:15. Boston Fed President Rosengren is due to speak at 4:15, Dallas Fed President Fisher at 7:30 and Fed Governor Tarullo at 8:30.  Senate Banking Committee Chairman Christopher Dodd is expected to release a draft of the bill on financial regulatory reform.

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