Metris Cos. Inc., which in April became the second major card banking company after Providian Financial Corp. to get its wrist slapped by regulators, seems to have been unable to shake off the troubles that brought it so much scrutiny in the first place.
On Wednesday, the Minnetonka, Minn., subprime card issuer blamed its second-quarter loss of $36.4 million, or 74 cents per share, on the weak economy, failed attempts to market to prime customers, and the pain of regulatory intervention.
Terrible numbers aside, Ronald N. Zebeck, Metris' chairman and chief executive officer, said that though he was "personally disappointed" in the results, the company had taken steps to improve its business.
In a conference call with analysts and investors, he also implied that other banking companies might soon feel the pain of regulatory restrictions.
"We are six months ahead of everyone else in the curve," Mr. Zebeck said. "We have taken our lumps, and some out there haven't taken their lumps yet."
Still, the situation remains dire enough that the only hint of guidance he would give is that the company hopes for a good 2003 - if all goes well during this year's holiday season.
In an update on its compliance with the Office of the Comptroller of the Currency's laundry list of requirements, Mr. Zebeck said that Metris had filed all the reports that regulators had requested and was waiting for feedback. "As of today, we believe we have delivered each of our deliverables in a manner acceptable to the OCC."
He also lamented that Metris' shares were, in his thinking, seriously undervalued. "We have never been given credit for the long-term value we have built," he said. The stock price - which fell 36.57% on Wednesday, to close at $3.85 a share - "does not reflect even the terminal value of the company."
In June, Metris responded to a stock price drop with a press statement saying it could not provide a reason for it.
Mr. Zebeck said the company's second-quarter loss rate had risen higher than he had expected. Though he would not predict that the rise in chargeoffs was over, he said that the nine-month and 12-month lagged chargeoff rates, which compare chargeoff rates to the portfolio size when the loan likely originated, were more promising, and offered cause for optimism that chargeoffs would decline soon.
Kathy Shanley, a senior analyst at Gimme Credit Publications Inc. in New York, said: "It is not surprising credit losses are higher, because Metris' agreement with the regulators limits its ability to grow by offering customers higher credit lines."
The results were in contrast to those of a fellow subprime issuer, Household International, which on Wednesday reported higher second-quarter revenues and growth in its mortgage and card portfolios. The Prospect Heights, Ill., company said improvements in early-stage delinquencies had resulted in lower late fees in its card businesses. [See "
Metris' managed loan portfolio shrank $81 million, to $11.7 billion. After spending $56 million on marketing, the company signed up 250,000 new accounts, but its account total stayed relatively flat, at 4.8 million.
The managed net interest margin shrank to 14%, from 14.5% in the first quarter and 14.1% a year earlier. Credit card fees, interchange, and other credit card income dropped 19% from last year, to $127 million, while credit card charge volume dropped 14%, to $2.2 billion.
The managed net chargeoff rate rose 2 percentage points from the first quarter and 4.1 percentage points from a year earlier, to 15%. The delinquency rate rose 4 basis points from the first quarter, to 10.2%.
Mr. Zebeck said that tighter line control produced much of the decrease in fee and charge income, as the company had begun refusing almost all overlimit purchases and cash advances - and sliced the fees from both in the process. In the future, "we will drive fee income back up by having more customers active, as we start to go into the second half of year during the holiday period," he said.
A key goal for Metris is to boost its number of accounts, but the going has been tough. Mr. Zebeck said it has had little luck in picking up prime customers. "We moved upmarket and spent our dollars a little unwisely, trying to look like more of a traditional card player, and that has backfired. We are going back to our knitting."
Ms. Shanley said Metris "may be losing some of its [non-subprime] customers to attrition." The company "is talking about raising marketing spending in order to resume its growth trajectory, but it will not be easy for it to satisfy regulatory concerns and expand its business at the same time."
Nonetheless, Mr. Zebeck predicted that Metris would do better than other issuers that have continued to push upmarket. He may have been referring to Providian, which abandoned subprime at the insistence of regulators.
"Some other banks are going after the high-end market," he said. "While they are up there fighting tooth and nail for unprofitable accounts, we have the opportunity to go after the core universe that we are good at managing."
Metris also plans to rely more on its enhancement business, which offers services and products besides loans, and has been opening more enhancement accounts separate from its credit card customers. According to Mr. Zebeck, that will lessen the company's dependence on its card-issuing subsidiary, Direct Merchants Credit Card Bank.
