Analyst Note: Credit Card Lenders
BusinessWeek.com - January 7, 2008
Broad economic woes could dampen consumer spending in 2008, crimping growth at major credit-card lenders like American Express and Mastercard, a Sandler O'Neill & Partners LLC analyst said Monday.
Michael Taiano said lower billed business and higher credit losses -- as a result of economic pressures on consumers such as untenable mortgage payments and unemployment -- will eat into profits at card lenders.
"We expect 2008 to be a challenging year for the U.S. consumer, as reduced levels of liquidity available from home equity, tighter underwriting standards imposed by lenders and rising unemployment levels are likely to negatively affect consumer spending and credit," Taiano wrote in a note about American Express.
He lowered his price target for that stock and cut his 2008 earnings forecast. American Express shares added 70 cents to $49.84 in afternoon trading, rebounding from losses earlier in the session.
Taiano expects the company to take larger provisions for credit losses and to book slower-than-expected revenue growth.
He said American Express is best positioned for the downturn in consumer spending because it has the wealthiest client base, but added, "We believe it is appropriate given the current economic uncertainty to take a more conservative view of American Express's earnings drivers," Taiano said.
Many economists are forecasting an economic recession -- technically two consecutive quarters of declining gross domestic product output -- as fallout from the credit crisis catalyzed by the housing market crash contaminates other areas of the economy. On Friday, data showed unemployment spiked in December, heightening anxiety over the likelihood of recession.
Mastercard shares fell $2.04 to $199.02, and Discover shares added 56 cents, or 4 percent, to $14.50.
