Credit card giant American Express warned Thursday that it will take a 4th quarter charge of $440 million because of slower spending and higher delinquencies last month. The company forecast 4th quarter delinquencies in its managed US lending portfolio will rise to 3.2% from 2.9% in the 3rd quarter, while the write off rate in the portfolio rose to 4.3% from 3.7%. It also expects card members spending to slow in 2008.
This confirms what many have been suspecting for some time, that mortgage woes are spreading to other types of loans, as the economy weakens and unemployment rises, producing a secondary pressure trend hitting financial companies.
Till the middle of last year, consumer loan losses were held in check as home prices rose, allowing borrowers to refinance mortgages or take out home equity loans, and use the cash to pay off credit card debts. But such activity came to a halt once the sub prime fueled credit crisis hit in August last year. Credit card defaults have been rising steadily since then and are poised to rise further. It comes as no surprise really, what is surprising that it took the consumer so long to get into trouble.
American Express says it is seeing the most weakness in the states of Florida and California, which have been hit hardest by the real estate meltdown. Shares of American Express slumped over 10% Friday, their biggest one-day slide in recent years. The problems are not confined to American Express. It is joined by Capital One Financial Corp., Discover Financial Services and Mastercard. Shares of all these companies took a beating.
Initially there were few signs that the sub prime mortgage woes were working into the credit card industry. Now that has changed, as Capital One and American Express have disclosed that consumers had loaded up on credit card debt to make up for the loss in purchasing power, formerly afforded by refinancing mortgages during the housing boom years.
The 1st quarter of 2008 is almost certain to be much worse for these companies. We are now in the holiday-season hangover period, when consumers face larger than average credit card bills. Given the likelihood of economic recession the consumers' ability to repay these inflated bills is under more pressure than ever before.
As the other credit card companies get set to report earnings, all eyes are on credit quality and the degree of acceleration in loan and asset deterioration. Investors could well be surprised by a combination of higher provisions and big write downs in the 4th quarter.