Providian Loan Woes Send Stock Tumbling
Providian Financial Corp., a highflying provider of credit cards especially to people with poor credit, announced a significant management shake-up and disclosed plans to scrap its business of issuing cards to high-risk borrowers.
The disclosure sent Providian’s stock plummeting 58% on Friday and raised new questions about such risky lending as the economy heads into a significant slowdown or recession.
Bank regulators and Wall Street have been scrutinizing the industry more carefully, forcing many so-called sub-prime lenders to tighten lending standards and police delinquent borrowers more aggressively. But delinquencies have been rising sharply.
Providian said its chief executive, Shailesh Mehta, who built the San Francisco company into the nation’s fifth-largest issuer of bank cards, will step down as soon as a successor can be found. Under Mehta, Providian developed software designed to offset the risks of sub-prime loans by setting high fees and interest rates.
Jack Carsky, Providian’s vice president of investor relations, declined to say whether it had been ordered by regulators to get out of the sub-prime business, citing legal requirements.
Providian has nearly 18 million accounts and $31.7 billion in loans outstanding, about a third of which are sub-prime.
David Gibbons, head of credit risk for the Office of the Comptroller of the Currency, would not comment specifically about Providian. But he said regulators are visiting some sub-prime specialists “almost full time” and are forcing them to greatly increase their reserves and capital cushion against rising losses.
“Some will be reporting very large provisions for losses, and it will significantly affect their earnings,” Gibbons said in an interview Friday.
“If we see a combination of high risk and management practices that are not sufficient to control it ... regardless of the level of capital, we’ll order the institution to exit the business.”
Although analysts say Providian was far more aggressive than most in marketing to high-risk customers and had chosen the riskiest segment of all, there are increasing concerns about rising defaults for sub-prime loans of all kinds. In a downturn, credit card accounts are usually the first to show problems, followed by auto loans and home loans.
Though only about 1.5% of the 9,747 banks and thrifts in the United States specialize in sub-prime loans, they make up more than 15% of the Federal Deposit Insurance Corp.’s list of problem banks. There are about 100 banks on the list, which is based on examinations of banks’ capital, asset quality, management, earnings, liquidity and exposure to market forces such as swings in interest rates. The banks are not identified publicly.
“You really have to work these loans hard to be successful,” FDIC spokesman David Barr said. Barr lists failure to perform this labor-intensive task as a factor in the recent demise of Superior Bank, a major sub-prime lender. Regulators estimate it will cost $500 million to pay off depositors in the Chicago-area savings and loan, which also got into trouble for over-optimistic accounting related to its sub-prime loans.
“The sub-prime sector is getting hit harder and sooner than people expected,” said David B. Sochol, an analyst with Legg Mason Wood Walker. But he noted that more-cautious competitors such as Household International Corp. and credit card issuer Metris Cos. so far have done a good job of controlling loan losses.
Providian told analysts late Thursday that it is prepared to slash expenses, raising the possibility of layoffs among the roughly 13,000 workers that the company employed as of Sept. 30.
Providian will stop virtually all attempts to attract new business for its standard cards, in which it had most of its sub-prime business, and will cap credit limits on existing standard accounts, which have an average balance of $1,400.
The company, which has extended $9.4 billion in credit on standard cards, said delinquencies of 90 days or more could reach 18% to 20% in the segment.
For the banking industry nationally, in the second quarter, credit card payments past due 30 days or more jumped to a seasonally adjusted 3.93% from 2.99% in the first quarter. That was the highest rate of increase in 29 years, according to the American Bankers Assn.
Providian also said it will freeze its high-end platinum card business, citing intense competition. Its platinum borrowers owe about $9.6 billion. The company instead will concentrate on its middle-range gold card business, in which it has extended $12.7 billion in credit. Only a few of the gold card holders are considered sub-prime borrowers.
Despite rising delinquencies in sub-prime lending, the company remains profitable and has a large cushion of cash on hand. But Gibbons, of the Office of the Comptroller of Currency, said such cushions of capital may not be enough as regulators crack down on risky practices.
Shares of the San Francisco-based company plummeted $7.25 to close at $5.15 on Friday on the New York Stock Exchange.
Other credit card issuers saw their stock prices fall modestly: MBNA Corp. lost 79 cents to close at $29.90, leaving it down 19.05% this year, and Capital One Financial Corp. slipped 98 cents to close at $47.67, off 27.57% for the year.
Even before terrorism made recession a near-certainty, the sub-prime specialists had been assaulted by the slowing economy, complaints of so-called predatory loan practices and a tightening web of regulations.
Bank of America and First Union Bank, both of which got into the business in the 1990s, retreated recently, citing higher-than-expected losses, their inability to predict payments from high-risk borrowers and the taint associated with accusations of predatory lending.
“I think we’re going to see a lot of assumptions put to the acid test” as recession sets in, said Bert Ely, an Alexandria, Va., banking consultant.
For those that have kept risks under control, analysts said it’s a great time because declining interest rates have helped them lower their cost of funds faster than their customers have refinanced at lower rates.
For example, Illinois-based Household, the second-largest sub-prime mortgage lender last year after Citigroup Financial, reported record third-quarter profit of $504million this week.
“The events of Sept. 11 ... certainly put stress on a lot of Americans, who now are having trouble keeping up payments” on existing debts, said Gary Gilmer, president of Household’s real estate lending operations. “Since our main product is debt consolidation, paying off credit cards, that means new customers for us.”
*
Times staff writer Leslie Earnest contributed to this report, and Associated Press was used in compiling it.
