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Continued economic deterioration and uncertainty over the $700 billion bailout Congress is still debating this week do not bode well for card issuers' results as the third quarter winds down today, Sanjay Sakhrani, an analyst with New York-based Keefe, Bruyette & Woods, tells CardLine. Card issuers already struggling with funding costs amid tightened credit conditions could find it difficult to extend credit to cardholders in coming months if liquidity dries up, he says. "The point the financial community is making to Congress is that there is a linkage between Wall Street and Main Street," Sakhrani says. "If there is no liquidity in the market, it drives up funding costs and makes it harder for lenders to extend credit to consumers." Declining liquidity already has increased funding costs for card issuers, as the market for selling securitized credit card loans has softened, Sakhrani notes. Discover Financial Services and American Express Co. are hit especially hard by these conditions because, unlike many large bankcard issuers, they cannot rely on bank deposits to help fund their credit, he says. "We are anticipating more deterioration [in profits] when card issuers post third-quarter earnings," Sakhrani says. "We are not close to reaching a peak in unemployment, and we think some of these measures may get worse. The current conditions have certainly pushed a recovery further back."
