May 22, 2009
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News: Three Top CC Companies Take Hit
Some stock analysts predict that Discover Financial Services (DFS.N), American Express Co (AXP.N) and Capital One Financial Corp (COF.N) will have a tuff time dealing with the new credit card reform legislation. Profits for all three companies are predicted to continue a downward trend as a result of the new legislation. The new legislation will prohibit arbitrary interest rate increases and implement rules that require lenders review accounts after six months of raising the interest rate. Lenders say the new bill will decrease profits and in turn cause increased customer costs and reduction in rewards. Single layer credit card companies like Discover, AmEx, and Capital One do not have the diversity in products as does majors like JPMorgan Chase and CitiBank to protect them from the repercussions of the new bill. Capital One is particularly vulnerable with more than 50% of their business coming from the credit card business.
Fitch, Standard & Poor, and Moody have all rate Discover Financial, based out of Riverwoods, Illinois with the lowest or second lowest rating due to their deep credit card business. It is expected that Fitch will soon downgrade Discover below investment grade which is sure to make the company’s costs rise. American Express and Capital One are expected to realize a modest downgrade, but will remain in the investment grade. Citigroup (C.N), JPMorgan (JPM.N), Bank of America (BAC.N) and Wells Fargo (WFC.N) all maintain a diverse portfolio making them less likely to feel any significant adverse effects from the legislation. In a conference call, Kenneth Chenault, CEO of American Express stated the new legislation’s impact will be “more negative than positive” for the company which is based out of New York. Robert Selander, CEO MasterCard, Inc. stated in a conference call with investors that the new bill will impact “every aspect” of their credit card business as well as alter their marketing strategies.
American Express, Discover Financial, and Capital One are all traded on the New York Stock Exchange and experienced a moderate decline in trading prices after the news that Congress had approved the Senate version of credit card reform. With less flexibility to respond to high risk accounts, the financial industry believes they will not be able to maintain the same level of credit availability.