Worries About Sub-Prime Market Drag Down Lenders, Card Issuers


Shares of credit card companies and lenders to consumers with spotty payment histories tumbled Monday after a Metris Cos. financial report raised concerns about the so-called sub-prime market.

Shares of Minneapolis-based Metris, the nation’s 10th-largest issuer of credit cards, tumbled $5.67 to $19.03 in New York Stock Exchange trading, a 23% decline.

Larger credit card issuers also declined, with Capital One Financial Corp. down $2.83 at $60.54 and MBNA Corp. off $1.32 at $37.43. Household International Inc., the giant lender to borrowers with tarnished credit, fell $1.84 to $56.30, while AmeriCredit Corp., whose customers can’t qualify for traditional auto loans, was down $2.08 at $36.29. All trade on the New York Stock Exchange.


Metris issues credit cards through its Direct Merchants Bank subsidiary and for Banco Popular and Western Union.

Metris specializes in lending to customers with limited credit histories, part of a decade-old trend that includes making unsecured loans to consumers with poor credit histories or none at all.

The borrowers’ ability to stay current on credit card debt has never been tested by recession. Some analysts worry they’ll be pinched by rising interest rates, which could translate into a rising default rate for Metris and similar lenders.

Metris describes its customers as moderate income, avoiding the term sub-prime, but Wachovia Securities analyst Meredith A. Whitney said Monday that most of them had credit blemishes. In its annual report Friday, Metris disclosed rising loan losses, higher average account balances and the fact that Direct Merchants Bank was undercapitalized briefly last year.

“This is suggestive of a cash-strapped/strained sub-prime consumer that has been hardest hit by the recession,” Whitney wrote. “The company’s plans to raise rates on its credit cards later this year should put more pressure on its customers.”

She cut her estimate of Metris’ 2002 earnings from $3.05 to $2.40 a share and for 2003 from $3.45 to $2.70.

Because consumers default sooner on credit card debt than on mortgages or auto loans, the business is sensitive to economic downturns. Last fall, regulators ordered Providian Financial Corp. to stop extending credit to sub-prime borrowers, and in February regulators closed the bank operated by NextCard Inc., the largest marketer of cards over the Internet. Greater than anticipated loan losses were cited in both cases.

Despite such actions, many analysts remain bullish on credit card and sub-prime lenders. Friedman, Billings, Ramsey analyst Todd A. Pitsinger, who rates Metris a “buy,” said Metris, MBNA and Capital One shares had risen sharply in the last three weeks, so the sell-off was unsurprising Monday, when a wide range of stocks sharply declined on Wall Street.

Calling rising loan problems “old news” for consumer finance companies, Pitsinger said he was encouraged by last week’s government reports that inflation remained tame while first-time claims for unemployment benefits fell, suggesting the economy was getting stronger.

“If people are employed, they’ll pay their bills,” Pitsinger said.



Losing Interest

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