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Double Whammy: Bank-Card Companies are Next
By: The Disciplined Investor   Monday, March 24, 2008 9:59 AM
Symbols: BAC, COF, GS, JPM, LEH, MA, NYT, WPO
What do banks do? Of course if they are publicly traded they have the ability to do the same as the brokers and other companies, yet a quieter and quicker maneuver is the bring in new deposits through higher yielding savings accounts. This also helps to bring up the reserve requirements for loans issued through credit card issues and direct loans.

The simple point shows that as customers continue to look for safer alternatives and margins are squeezed as delinquencies and defaults rise, banks that do a big business within the consumer credit card arena could be hit by both problems of limited capital available to loan and ceilings on the fees they can charge for those loans.

The problem for COF is not restricted to our country. Over the past several years, Capital One move aggressively into England and offered attractive terms in order to expand their reach into the credit card business. The New York Times recently explored this problem in the March 22 article entitled, Debt-Gorged British Start to Worry That the Party Is Ending:

…Economists say Britain's relationship to debt is complex, but at its core is a phenomenon more akin to recent American history than European trends. As in the United States, a decade-long housing boom and strong economic growth bolstered consumer confidence, creating a perception of wealth almost unknown in countries like Germany and Italy.

…The average British adult has 2.8 credit or debit cards, more than any other country in Europe. A growing number are borrowing to pay for vacations, furniture, even plastic surgery. As a result, Britons are spending more than they earn, racking up a household debt-to-income ratio of 1.62 compared with 1.42 in the United States and 1.09 in Germany.

CNN/Fortune has picked-up on the potential problem back in October, 2007. It is becoming ever apparent that there is a trend that is developing on both sides of the Atlantic. The looming question being asked is; How similar are the problems of British consumers are to those of their Americans counterparts. If England is really an advanced indicator, the pain will be unbearable in the next few months. The $915B bomb in consumers' wallets:

If there is an international precedent the U.S. should be watching, it's actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate market there rose faster and fell earlier, they're about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain have risen as much as 50%, forcing banks to take huge write-offs.

It's a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That's suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it's not a trend that crosses the Atlantic.

So, that all lead to the main point of the discussion: Capital One Financial. Take a look at business model for the biggest issuer of credit/bank cards in the U.S.:

The National Lending segment consists of three sub-segments: the U.S. Card sub-segment, which consists of domestic consumer credit and debit card activities; the Auto Finance sub-segment, which includes automobile and other motor vehicle financing activities, and the Global Financial Services sub-segment consisting of international lending activities, small business lending, installment loans, home loans, healthcare financing and other diversified activities.

At this stage of our economic cycle, any one of the three sectors would be enough to concern for an investor . This is not the time to be tinkering in an area that has seen a historic contraction without any real plan for recovery. Reports on revolving and non-revolving credit have not been encouraging either.


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