PaineWebber Inc. analyst Gary Gordon initiated coverage of the credit card industry on Tuesday with a "neutral" rating, arguing the sector is poised to face higher delinquency rates and fierce competition.
He placed "neutral" ratings on Dean Witter, Discover & Co., American Express Co., First USA Inc. and MBNA Corp., and an "attractive" rating on Advanta Corp. because of its price.
"Last year 26 credit card companies grew by at least half a billion dollars in receivables," he said. "And some of the bigger players that have been losing market share have now vowed to reverse that trend."
This will cause a fierce price war that will limit the industry's profitability, he said. With credit losses at all-time lows, he added, chargeoffs inevitably will rise as the economy slows.
A countervailing view came from Samuel Liss, a managing director of equity research at CS First Boston, who argued that the competition issue already had been discounted in the companies' share prices.
Tremendous markets remain to be tapped, Mr. Liss said, arguing that charge volume will rise with the acceptance of credit cards by supermarkets, gas stations, and post offices.
There is no question that delinquencies have hit their low, he said, but "the positive profit dynamics of the industry will not be shut down overnight."
American Express finished up 12.5 cents to $33.125, Advanta rose $1.25 to $33, MBNA Corp. was unchanged at $28, Dean Witter lost 12.5 cents to $42.50, and First USA gained 75 cents to $39.875 in trading on Tuesday.
Signs that the economy is slowing were magnified Tuesday when the Commerce Department released its February retail sale report, which was down 0.5%, compared with consensus estimates among economists of a 0.2% rise.
This sparked a rally in the bond and stock markets as investors became convinced the economic news would stave off another Federal Reserve interest rate hike.
Nonetheless, the bank sector lagged behind the overall index, despite the conventional wisdom that interest-sensitive sectors like financials rise when rates stabilize or appear ready to decline.
The Standard & Poor's 500 index of banks rose 0.41%, compared with the S&P rise of 0.58%.
"Because the banks have outperformed this year, the market is playing a little bit of catch-up," said Michael Mayo of Lehman Brothers.
The overhang from Bankers Trust New York Corp.'s loss may also be hurting the sector, he added.
Bankers Trust, which announced a $125 million first-quarter loss caused by Latin American and derivatives operations late Friday, plummeted nearly $10 Monday.
Bankers was off 87.5 cents to $50.625 Tuesday, after being down more than a dollar earlier in the day.
Southern National Corp. fell 37.5 cents to $20.625 after Oppenheimer & Co. removed the bank from its recommended list because of expected margin erosion this year.
The Dow Jones industrial average finished up 23.52 points to 4,048.75, and the 30-year Treasury bond was up 39 basis points, sending its yield down to 7.36% in late afternoon trading.
