money markets has wreaked havoc at financial institutions
worldwide, and now it appears that credit cards could face a fate
similar to that of US subprime mortgages, according to various
industry analysts. Truong Mellor reports.
In the space of six months, global money markets have been turned
upside down and profits at financial institutions worldwide have
taken a severe hit following a downturn in the US housing market,
which has led to rising levels of subprime mortgage defaults and
the ensuing credit crunch that has fanned out into the global
One domino effect from the subprime fallout that markets are
already witnessing is a marked rise in bad credit card debt. As the
holiday season approaches, there are fears that over $400 billion
of US credit card debt could be dragged into the black hole of the
credit squeeze, as American consumers resort to other forms of
borrowing as their mortgage credit ultimately exhausts. This
situation has only been aggravated by banks that pushed increased
credit card borrowing with less than stringent lending standards as
the mortgage market became less enticing.
Credit card delinquencies may rise
As American homeowners file for bankruptcy and lose their houses to
foreclosure in droves, there is a growing fear that credit card
delinquencies will begin to rise. Capital One, the largest
independent credit card issuer in the US, has already reported a
rise in delinquency rates and accordingly adjusted its forecast for
2008 credit losses up to $5.5 billion (see
CI 391). Credit card companies across the board are setting
aside larger reserves against default losses from people failing to
pay their bills.
These concerns were articulated by HSBC, when the bank was forced
to make an extra $700 million write-down in its third-quarter
figures. The bank warned that this was a direct knock-on effect
from its subprime mortgage business onto its consumer lending
business, with most of these figures attributed to motor loans and
bad credit card debt.
Much like the subprime mortgage loans, more than one-half of all US
credit card debt – totalling over $920 billion – was bundled up and
sold off across the globe to investors. Furthermore, the level of
this securitised credit card debt has risen steeply in the past 12
months, according to ratings agency Standard & Poor’s, which
reported a $40 billion increase during this period. It will remain
difficult to gauge exactly how big the spill into the consumer
arena has been while the housing crisis continues to unfurl.
However, should delinquency rates start to shoot up, it will be the
larger pension funds and mutual funds that primarily deal in this
securitised credit card debt that will be affected, rather than the
Wall Street banks.
“We haven’t seen problems in consumer loans outside of the mortgage
arena. They still keep up their credit card payments and auto
payments. If we see an increase in losses then there would be
reason to worry,” according to David Wyss, the chief economist at
Standard & Poor’s who compiled the data, speaking at a
conference on banking organised by the credit rating agency.
Low credit card debt
So while it is clear that the problems faced in the housing market
are beginning to seep into other areas of consumer finance, what
remains unknown is the actual level of subprime debt within the US
credit card market as a whole. Overall, the level of credit card
debt is at a historically low level, but analysts fear that more
increases in losses could gravely destabilise the market.
Before the credit squeeze this year, delinquency rates on cards had
been dropping since 2002. While the new bankruptcy laws that came
into force in 2005 caused a spike in delinquency rates at the end
of that year, they appear to have flushed the most skittish credit
cardholders out of the system. Some of the more optimistic
observers believe that the mortgage meltdown may even help the
industry by bringing back consumers who had previously used the
equity of their homes as a means of accessing quick cash.
However, the securitisation market remains the albatross around the
neck of the credit card industry. Investors caught out by
mortgage-backed securities are now fearful that other securitised
products are about to slide. Additionally, there is the risk that
the subprime mortgage meltdown will have a backhanded effect on the
credit card industry through the employment market. If a slowdown
in the housing market leads to increased layoffs, unemployed
workers are likely to cut back on credit card spending. And since
the majority of Americans do not have a large savings cushion, an
increase in unemployment could lead to a sharp rise in credit card
defaults. According to a report recently published by research
organisation Demos, US homeowners cashed in $1.2 trillion in home
equity over the past six years to pay off debts and cover living
expenses, further threatening their financial security.
As these problems continue to beleaguer the US and by extension the
European markets (notably with Discover’s recent announcement that
it intends to write down the value of its Goldfish credit card
business in the UK by up to $422 million), consumer finance in
other parts of the world is comparatively buoyant. In Latin
America, the large under-banked population has gained access in
recent years to a diverse range of products and services, as major
financial players have begun to turn their attention to the region
and its growing economies.
The two biggest players in global consumer finance – GE Money and
Citi – are increasingly reliant on international markets as US
growth flattens. GE Money is active in six Central American
countries – Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica
and Panama – and in several Asian markets including the
Philippines, South Korea and China.
While global profits for GE Money were healthy for the third
quarter of 2007, figures for the Americas region were down by 4
percent. As a result of this, the company’s overall numbers dragged
due to the increase in delinquency provisions for its US book.
Unsurprisingly, this has caused GE Money to look abroad for further
growth. It currently has plans to incorporate a subsidiary bank in
Shanghai, and has a 43 percent stake in both Hyundai Capital and
Hyundai Card in South Korea, offering consumers various loan
products, mortgages and credit cards. The company is also targeting
emerging banking markets such as Taiwan and Thailand, and is hoping
to achieve a $100 million net income within five years.
In Europe, GE Money is involved in numerous projects, including a
consumer finance venture with Turkey’s Garanti Bank, and has formed
joint ventures with several Spanish savings banks to provide
consumer loans and credit cards. The company is also very keen on
the Russian consumer finance market, having begun operations there
in 2004. GE Money revenues and net earnings increased 12 percent
and 15 percent in 2006, respectively, with nearly $1 billion of
revenue added in the form of acquisitions. However, a substantial
part of these net earnings was from lower-taxed earnings from its
Citi looks overseas
Likewise, Citi has been increasing its overseas operations as its
US consumer base has begun to tail off as a major revenue driver.
International card purchase sales have grown 6 percent between the
second and third quarters of 2007. Year-on-year, its international
consumer revenue growth has grown by 35 percent, while the
year-to-date growth is an impressive 22 percent.
In particular, Citi has achieved impressive levels of growth from
its Japanese consumer operations. Card purchase sales were up 37
percent in the third quarter of 2007 from the same time last year,
while card loans also managed a 52 percent increase for this
period. By comparison, card purchase sales in the US market were up
by only 6 percent.
Citi’s international cards operations offer a variety of cards
products to almost 21 million accounts in 42 countries outside of
the US. Income rose by 17 percent by year-end 2006 from the
year-ago period and US card income grew by 41 percent during this
time. The credit crunch appears to have brought an end to these
types of numbers for their domestic market.
Citi had made a concerted attempt to drive growth from business
abroad recently. This month, the bank paid nearly $425 million for
Taiwanese local lender Bank of Overseas Chinese, and sees the
Taiwan market as one of great potential. Citi is divided into three
major business groups: Global Consumer, Global Wealth Management
and the newly formed Citi Institutional Clients group.
Citifinancial, the group’s consumer finance arm, generated
approximately 55 percent of the Global Consumer Group’s overall
profits. Of this, its cards operations constitute nearly 40
percent. In Mexico, Citi operates under the Banamex brand; the
country’s largest bank, it is now fully owned by the group.
Yet with the US standing on the edge of a recession, the buoyancy
of these international markets will be sorely tested as the effects
of the global credit crunch worsen. Should the price of oil
continue to surge, the threat of corresponding rises in inflation,
energy and fuel costs, and consumer goods will undoubtedly have a
knock-on effect for consumer spending across the globe.