Stocks of credit card companies have trounced the bank averages this month, a sign investors are overcoming recent anxiety about the sector.
Since Oct. 1, Providian Financial Corp.'s stock has risen 23%, Capital One Financial Corp. 20%, MBNA Corp. 15%, and Metris Cos. 13%.
That performance was far better than the 5.6% rise in the Standard & Poor's index of 31 banks and a 3.8% increase in the Nasdaq index of 721 banks.
Why are these stocks rising faster than the averages? In part, the credit card company stocks had lost more than banks in recent months. While the Standard and Poor's bank stock index lost 19% from May 1 to Oct. 1, Providian had fallen even harder, down 39%. Capital One was down 33%.
The declines reflected a variety of issues, ranging from investor malaise about financial stocks to Bank One Corp.'s surprise August announcement of customer runoff at its First USA unit. Consumer lawsuits against credit card issuers and an investigation by San Francisco's district attorney of Providian's consumer lending practices also caused investors to dump credit card company shares.
But in the past two weeks, investors have had a change of heart, perhaps emboldened by cheaper prices of the credit cards versus earnings potential.
"People are coming back to the credit card companies," said David Allaire, co-manager of Retirement Planning Co. in Providence, R.I., which manages a fund that invests in financial stocks. Some of those companies "really know what they are doing," he said.
Now credit card lenders are benefiting from good omens in the market, said David Berry, director of research at Keefe, Bruyette & Woods Inc. in New York.
MBNA Corp., for example, reported third-quarter earnings that were 26% higher than the year-earlier period. The Wilmington, Del.-based company has averaged 25% earnings growth over the 35 quarters since it became a public company in 1991.
After Chicago-based Bank One announced problems with First USA, credit card companies suffered a ripple effect. But MBNA, with a report of third-quarter-receivables growth of 16%, to $67.4 billion -- most of it done internally -- helped allay investor concerns of a spillover effect of Bank One's troubles.
"You see growth at MBNA, and that makes you feel better about the card issuers as well," Mr. Berry said.
Another dark cloud may be starting to dissipate, Mr. Berry said. Last week, rumors circulated that the San Francisco district attorney was in talks with Providian to settle concerns about the company's consumer lending practices. While the company and the district attorney would not characterize the discussions, Mr. Berry said the fact there have been talks "gave a lot of investors a reason to believe that a portion of the legal issues surrounding Providian might be lifted."
The credit card companies have also pleased Wall Street with efforts to diversify revenue streams. "Their earnings are becoming more consistent with the products they are starting to offer," Mr. Allaire said.