Providian Financial Corp., having steered its way through a grueling two years and become much smaller, is trying to show it can once again expand in a business unfriendly to companies that lack scale.
Joseph Saunders, its chief executive, told analysts Wednesday that the time is right for Providian's new near-prime strategy. Once the biggest subprime credit card issuer, then a would-be entrant in the prime market, it now seeks share in a "middle" market that, according to Mr. Saunders, competitors have vacated.
Meanwhile, Capital One Financial Corp. seems to have stolen share in the tightly packed prime market. Analysts conceded that its hefty loan additions last month, on top of big growth in July, is a telling event in a flat market. Richard D. Fairbank, the McLean, Va., company's CEO, says its move upstream is paying off and perhaps pushing out competitors.
He and Mr. Saunders made nearly back-to-back presentations at a conference sponsored by Lehman Brothers.
Providian is hoping that a shift by other issuers toward higher-quality credit is leaving it room in the segment it is now targeting: "the near-prime part" of the subprime market.
"A year and a half ago a lot of activity in that market was driven by Capital One and by the credit card portfolios of Sears [Roebuck and Co.], Circuit City, and Target. And, of course, Metris," Mr. Saunders said. "Capital One has backed out of the market, or is putting less emphasis on it. Metris for obvious reasons has backed out of it. Sears sold its portfolio to Citi, Circuit City is trying to sell, and Target isn't aggressively growing it."
The market is still competitive, but it has changed, he said.
Providian's strategy represents a shift from earlier aspirations in the prime segment, which proved too tough to crack in a significant way.
Analysts had mixed reactions to the shift.
"It makes sense to try something different" after failing to make much of a splash in the prime market, said Chris Brendler of Legg Mason Wood Walker Inc. "When they got out of the gate with a pretty generic prime [strategy], it really didn't work. I think they would admit that they found the competition too heavy and the pricing too irrational."
But Reilly Tierney, an analyst at Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc., said the middle market is equally competitive. "It's hard for me to get a handle on why they would be so much more fantastically successful than everyone else at doing exactly the same thing."
Mr. Saunders defined Providian's new target as the 40 million Americans with $200 billion of unsecured credit and Fair Isaac scores of between 620 and 700. The band below 670, he said, is particularly underserved. "While many large lenders have [some business] below this level, they do not aggressively market to this group."
He also put in a word for his company's proprietary credit scores, which were much touted during the previous regime. The scores give Providian an edge over other issuers in predicting loss rates across the portfolio, he said.
The San Francisco company will rely on reward cards, customer service, and cobrand and affinity partners to reach this group, Mr. Saunders said. "As we conducted research into the middle market, it became abundantly clear that these consumers are looking for something quite different than what they're currently receiving from credit card lenders."
In reward programs, for example, "a free dinner or a tank of gas" is a more realistic prize than air travel, and Providian's "real rewards" program will feature attainable perks, he said. (The company will also let cardholders check their FICO scores online for free.) Several affinity agreements are close to finalization and will be announced shortly, he said.
Providian currently has $17.1 billion of receivables and 11 million cardholders. It expects to add $1.6 billion of loans in the second half of this year.
Capital One's strong August numbers provided a fine setup for Mr. Fairbank's speech. On Tuesday it posted lower losses and higher growth than expected, lifting analysts' estimates and sending its stock up. The monthly chargeoff rate dropped 41 basis points, to 5.34%, and delinquencies shed 18 basis points, to 4.74%.
With more evidence that losses have peaked and that its superprime strategy is working, Mr. Fairbank said he was happy to be back in Wall Street's good graces. "I've always felt it was so ironic that we're one of the most volatile stocks with one of the most stable earnings trajectories."
In April the company announced that it would no longer make specific loan-loss predictions on its $60.7 billion portfolio. "We want to get out of the business of precise forecasting of losses," Mr. Fairbank said Wednesday in response to analysts' questions.
It started giving these forecasts only last year, when it found itself - under a regulatory agreement and with chargeoffs expected to rise for several months - in the "challenging position" of having to convince investors that its credit quality was not fundamentally deteriorating, he explained.
At the time Mr. Fairbank had much to do to persuade analysts that the spike in losses was an effect of the portfolio's overall shift to higher-quality loans and therefore to a slower-growth model. "We had to stick our neck out in terms of when [losses] were going to turn and by how much."
Time has borne out the company's assessment, he said. "The nice thing is to be on the other side of it."
Mr. Tierney, who upgraded Capital One's stock Wednesday to "outperform" from "in line," said he was comfortable with the decision to stop giving precise forecasts. "Twelve months ago, when the subprime seasoning was coming to the surface, they realized they needed to be very precise about when that would peak."
When chargeoffs peaked sooner and lower than expected in the first quarter, Capital One regained its credibility, he said. "Basically, they've delivered right on the market, which has been critical in establishing investor confidence."
Mr. Fairbank said that seasonal effects will push losses up slightly in the fourth quarter, but "we don't want to get into the 'uptick a little bit/downtick a little bit' game."
