The boom in consumer finance stocks is out of step with the economy and borrowing cycle, cautioned a Wall Street analyst who thinks the supply of consumer credit is fast outrunning demand.

Indeed, Gary J. Gordon of PaineWebber Inc. recently estimated that the supply of consumer credit would be 50% ahead of slowing demand this year and one or two times expected demand next year.

The consequences for investors could be nasty, he said, if consumer lenders are forced by pricing and other competitive pressures into sloppy underwriting practices that aggravate credit losses and undercut earnings.

Mr. Gordon noted that Wall Street has an unfortunate habit of ignoring credit cycle warning signs, like rising office vacancy rates, until earnings are actually hurt. He cited the performance of Citicorp's stock during the 1980s as an example.

"Commercial real estate was clearly out of supply-demand balance by 1982," he said. "However, Citibank's stock price rose merrily through 1988 and 1989 until the real estate loan writeoffs hit."

So far this year, stocks of credit card issuers have been strong performers, helped by Banc One Corp.'s planned acquisition of First USA. Other finance company stocks have been mixed in the wake of the problems at Mercury Finance Co. and Jayhawk Acceptance Corp.

Mr. Gordon cited several reasons for his belief that demand for consumer credit, already weakening, will continue to decline. The biggest is the economic and credit cycle itself.

While the nation's economy is finishing its sixth year of expansion, 1996 was also the fourth year in which debt growth has exceeded income growth. This year, he expects consumer debt to grow 8% while personal incomes rise 6%.

"Installment debt over time grows only slightly faster than incomes," the analyst pointed out. Historical economic patterns suggest that "the cyclical consumer financial restructuring period is at hand."

As evidence of this cyclical trend, consumer debt stress signs, including chargeoffs and personal bankruptcies, "suggest that debt growth must slow," he said. Nevertheless, many consumer lenders have aggressive growth projections.

"Banc One assumes that First USA can grow 20%-plus for the next five years because it believes that credit card debt will grow by 20% annually," Mr. Gordon noted. Similarly, Dean Witter, Discover & Co., merging with Morgan Stanley & Co., projects card debt growth of 15%-20% annually.

"We believe these estimates are way too optimistic," the analyst said, "but we're not the ones doing the buying."

Adding to the supply of credit are subprime mortgage companies, which have arisen as major competitors of credit card issuers in recent years. They also have big growth plans, Mr. Gordon noted.

"Subprime lenders as a group could easily originate $10 billion to $15 billion in 1997," the analyst said. "In effect, a major credit card competitor on the order of another MBNA has appeared out of the blue."

Half these originations are really credit card debt, he noted. Subprime lenders are increasingly making unsecured loans that replace credit card debt.

Mr. Gordon worries that consumer lenders "have not yet come to the conclusion that they must slow debt growth to prevent further losses."

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