What's Really in the Cards

Inquiring minds are taking second look at the consumer credit numbers reported last week. Please consider Consumer credit falls more than expected in December.

Consumer borrowing fell for a third straight month in December, the longest stretch in 17 years, as households cut spending amid a steep recession and rising job layoffs.

The Federal Reserve said Friday that consumer borrowing dropped at an annual rate of 3.1 percent in December. The $6.6 billion decline was nearly double what analysts expected. It followed an $11 billion drop in November that was the biggest monthly plunge on records going back to 1943.

The weakness in December reflected a big 7.8 percent decline in the category that includes credit card debt, and a 0.2 percent drop in the category that includes auto loans.

Consumer spending fell in both the third and fourth quarters last year, the first back-to-back declines since the 1990-91 recession. The three straight months of declines in consumer borrowing was the longest stretch of weakness since a seven-month plunge that ended in December 1991.

MasterCard Rises After Beating Estimates on Pricing

Let's dig a litter deeper into the details of a Bloomberg headline: MasterCard Rises After Beating Estimates on Pricing

The value of transactions made by cardholders fell 5.2 percent in the U.S., 7.1 percent in Europe and 6 percent in Latin America, compared with a 3.8 percent rise in Asia and 9.3 percent rise in South Asia, the Middle East and Africa, as a stronger U.S. dollar cut the value of purchases made overseas.

MasterCard�s quarterly net income fell 21 percent to $239.4 million, or $1.84 a share, from $304.2 million, or $2.26 a year earlier when the company sold a stake in a Brazilian firm, the company said today in a statement.

Like Visa, MasterCard is insulated from rising credit-card defaults because the networks process transactions and don�t make loans to cardholders. Lenders have reported declining profits as charge-offs rise, including American Express Co., which said fourth-quarter profit from continuing operations plunged 72 percent to $238 million.

Capital One Financial Corp., the Mclean, Virginia-based credit-card lender and bank, posted a surprise $1.42 billion fourth-quarter loss last month after it added $1 billion to loss reserves. The lender expects about $8.6 billion in soured loans in the next year.

More consumers fall behind on paying credit cards

USA Today id reporting More consumers fall behind on paying credit cards.

Credit card delinquencies are hitting record highs as more borrowers fall behind on bills amid rising unemployment and falling home values.

The amount of credit card debt delinquent at least 60 days reached 3.75% in December, the latest month available, surpassing the previous high of 3.73% set in February 1998, according to Fitch Ratings, which rates corporate debt. Late payments on credit cards, a precursor to charge-offs, rose during most of 2008 before sharply accelerating in the fourth quarter.

In December, credit card charge-offs � when banks write off the debt � rose to 7.5%, the highest level since 2005, when thousands of consumers rushed to file for bankruptcy and erase their card debt before a new law made it harder to do.

Fitch expects charge-offs to approach 9% in the second half of 2009.

Canadian Writeoffs Soar To $800 Million

AHN is reporting Losses Of Canadian Credit Card Firms Forecast To Hit $800 Million

A study by the Amex Bank of Canada projects credit card losses of Canadian credit card companies to reach $800 million in 2009.

Economic difficulties will cause more Canadian consumers to hold off paying their credit card bills, to be exacerbated by a rise in interest rates. Amex said beginning Feb. 11, interest rates on some American Express cards will go up 1 to 3 percent to 21.99 percent.

Deloitte & Touche partner Pat Daley said Canada is undergoing a similar experience what U.S. credit card holders are going through. "We're starting to see some indicators from a debt load point of view that credit card debt is becoming more of a problem for the issuers," Daley told the Toronto Star.

Reflections On Grim Data

Minyan Peter, former treasurer for a large Midwest Bank and one of the best reads on Minyanville, had this to say. ....

What's Really in the Cards?

I know for most Minyans, when they think about MasterCard (MA) and Visa (V), they think about them as trading vehicles. To me they are great real time sources of data.

And at the risk of raining on other Minyans' parade, the data was grim. While all the analyst reports I have read talk about the declines in year on year growth rates, no one I know has focused on the real issue - Per MasterCard, from the third quarter to the fourth quarter total credit sales in the US fell almost 4.5%, and globally, measured in dollars, the decline was almost 9% quarter on quarter. Further, and contrary to what I was expecting, debit too saw quarter on quarter declines. And at the risk of stating the obvious, the fourth quarter includes Christmas.

Never in my near 25 year career have I seen a Q3 to Q4 decline in volumes. They just don't happen. At least not until now.

I expect that both MasterCard and Visa, as they did in the fourth quarter, will attempt to address their revenue declines by cutting advertising and other spending - and the "Priceless" campaign will likely become "Commercial-less".

But longer term, I expect that their core processing margins are likely to be squeezed hard by both bank issuers and merchants. And with the issuers no longer meaningful shareholders, I expect the banks will push hard - especially if issuer consolidation plays out as I expect.

Finally, were I to go back to get a Phd in Economics it would be to study deflation and its effects on oligopolies. If OPEC is any indicator, it looks to me like deflation is kryptonite. How long Visa, MasterCard, Discover (DFS) and American Express (AXP) can stand together remains to be seen, but with all facing material margin pressures, I have to believe it may not be long before it is every man for himself.

As Minyan Peter suggests, those declines were much worse than they originally looked. Not only did transaction volumes decline, but chargeoff rates are rising.

Visa and MasterCard are not subject to chargeoffs. However, there is going to be immense pressure on them, by everyone else to reduce fees. And remember a new Cardholders Bill Of Rights is poised to eat into the profits of card issuers.

What's in store: Fewer transactions, Lower gross margins, Rising late pays, More charegoffs, and New rules and regulations making it harder to raise rates and fees. Deflation is hitting the card industry.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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