The division of the credit card industry into two tiers, one successful and one distressed, continued to take shape Wednesday as MBNA Corp. stepped forward to say it was expecting impressive fourth-quarter results and Morgan Stanley Dean Witter & Co. described its Discover Financial Services unit as a source of strength in an otherwise weak yearend.
While analysts praised MBNA and Discover as two card companies that get things right, two other firms that had earned similar endorsements last year, Providian Financial Corp. and NextCard Inc., have fallen from grace amid regulatory and financial problems.
It has been our thesis that this year you would see a separation between the winners and losers, said Robert P. Napoli, an analyst with ABN Amro Bank. The most difficult time is yet to come, as more people file for bankruptcy in the first half of the year. We are not out of the woods.
The differences were put in stark contrast this week when Providian which must, under a deal with regulators, announce its chargeoff rate monthly said its November rate was 12.80%. Discover and MBNA said their rates for the month were 5.85% and 4.90%, respectively.
The companies that have posted favorable results cited various factors sticking to business basics, using steely-eyed credit risk management, and keeping tight fists on expenses but also acknowledged that the recessionary climate has hurt business. Stephen S. Crawford, Morgan Stanleys chief financial officer, told investors during a conference call Wednesday that his companys overall profit picture would have been even better if not for declining credit quality among its Discover cardholders.
The higher interest rate spread and higher fee revenues more than offset the rise in chargeoffs at the credit card unit, Mr. Crawford said. Next year, higher chargeoffs could more than offset higher spreads.
Though Morgan Stanleys other units mostly reported decreased income, fourth-quarter net income at Discover was $193 million, up 31% from the year-ago quarter, though down 2% from the third quarter. The 5.85% chargeoff rate on the $49.3 billion portfolio was essentially flat with the third quarter but up 128 basis points from a year ago. Under Morgan Stanleys accounting practices, the fourth quarter ended Nov. 30.
Mr. Crawford said Discover had managed to post good numbers the old-fashioned way by cutting spending, shoring up its collections department, and building cash reserves for what it anticipates will be a gloomy 2002. We have made meaningful cost reductions, and made a real investment in collections and capturing wallet share and kept expenses flat by managing marketing expenses, he said. We have realigned to promote fee-based products and accounts.
Discover has focused a lot of its customer retention strategy on the Internet, and it now boasts that 22% of its 47.6 million cardholders are registered on the Discover Web site, thus extending our Internet leadership, Mr. Crawford said.
Discover spent $142 million on marketing in the fourth quarter, 35% less than it spent in the same quarter last year, when it ran a slew of prophetic television ads featuring consumers getting into trouble with their credit cards. Discover cut compensation and benefits by 7% over last year, to $169 million, while it managed to increase fee revenue by 28% over the fourth quarter of last year, to $914 million.
Mr. Napoli of ABN Amro praised Discovers conservative approach of adding to credit reserves against future chargeoffs. As a result, he said, It is likely the peak will be manageable.
Other analysts also called Riverwoods, Ill.-based Discover one of a handful of credit card issuers that have managed to succeed in a trying economy. MBNA, Citigroup Inc.s Citibank unit, and Capital One Financial Corp. are others that get the nod.
MBNA, of Wilmington, Del., on Wednesday said it expected stellar fourth-quarter results, ones that will meet or exceed consensus estimates. Among the tidbits it released was that for the fourth quarter through Dec. 18, it had added an impressive $4.1 billion in managed loans through internal growth, and that during the first 11 months of the year it had picked up 8.8 million new accounts. Loan losses will be comparable to third-quarter levels and are significantly lower than published industry levels, the release said.
There is probably a lot of uncertainty right now in our industry, said Brian Dalphon, a senior executive vice president at MBNA. What we focus on is sticking to the fundamentals: getting the right customers and keeping them. MBNA said its typical new cardholder has an average annual income of $70,000, has been employed for 11 years, owns a home and has more than a 17-year history of paying bills promptly.
Mr. Dalphon said MBNA also consistently posts chargeoff rates among the lowest in the industry. We have credit analysts looking at applications and making decisions [and] that has helped us build a high-quality customer base that performs well in any environment, he said. MBNAs master trust reported a November chargeoff rate of 4.90%.
MBNAs strategy of signing up well-heeled affinity groups to exclusive card-issuing deals has worked well, analysts agreed. MBNA has better organic growth than Discover, in part because of its affinity strategy, Mr. Napoli said.
Moshe Orenbuch, an analyst at Credit Suisse First Boston in New York, reacted to MBNAs announcement by reiterating a strong buy rating, and writing, We would note that fundamentals are improving at MBNA, with higher margins, controlled losses, and balance growth beginning to reaccelerate.
E. Reilly Tierney, an analyst at Fox-Pitt, Kelton, said a key difference between Providian and companies like MBNA and Discover is their attention to building loan loss reserves. What [MBNA] did was to use excess earnings to build reserves rather than beat the numbers over the last several quarters, he said. That has been the essential driver for MBNA; they stuck to their knitting.
