A sweeping U.S. credit card law will mean sharply lower revenue for issuers and may force some out of business, but some of the market leaders could end up even stronger.
U.S. President Barack Obama's signing of the legislation, designed to ease the burdens of recession-battered consumers, will cap rates and fees on cards starting next February -- and add pressure to an industry already facing massive credit losses that might not peak for several more months.
But analysts expect JPMorgan Chase & Co, American Express Co, and Discover Financial Services to emerge as winners as smaller rivals and those with greater exposure to subprime clients curtail the availability of credit.
They enter this cycle with much better, much healthier loan books than most of their competitors, said Morningstar Inc analyst Michael Kon.
On the other hand, issuers such as Bank of America Corp and Citigroup Inc may struggle because of their greater exposure to riskier borrowers and higher dependence on interest income.
Besides interest and fees paid by cardholders, issuers make money by taking a percentage of merchants' revenue from each transaction.
The new law will make card companies wait longer to raise rates on existing balances and bar them from doing so when a customer falls behind. They also will not be able to charge over-the-limit fees unless the customer requests the extra credit.
The federal government is stepping in and making it harder to gouge or make high profits from less financial savvy customers, so you are going to get hit on the revenue side, said James Ellman, president of hedge fund Seacliff Capital.
Moreover, analysts expect the rate of industrywide losses from credit cards to peak at 12 percent to 14 percent in 2010, up from 10 percent now, pushing annualized losses close to $100 billion. The industry may not be profitable again until 2011, they said.
JPMORGAN, AMERICAN EXPRESS, DISCOVER
JPMorgan, the largest issuer of Visa credit cards, expanded its loan book at a slower pace than many rivals during the last credit boom.
In particular, the second-largest U.S. bank by assets limited its exposure to California and Florida, two big states hard hit by the nation's recession and housing bust.
Their credit card platform will fare very well coming out, said FBR Capital Markets analyst Scott Valentin. They will have capital to allocate in the business, so they will do better than other banks.
American Express suffered steep credit losses after relaxing its standards and expanding in California and Florida earlier this decade, but it has remained profitable overall.
Credit issues at the company could diminish as it refocuses on its traditional clientele of wealthy and corporate clients, analysts said.
It will be easier for them to adapt because they already are in that market, said Walter Todd, portfolio manager at Greenwood Capital Associates.
Discover, a smaller credit card issuer, will also benefit from its decision to expand cautiously. And because it has its own network, it does not have to pay the fees that rivals such as Bank of America and Citigroup hand over to Visa Inc and MasterCard Inc.
Bigger isn't always better, said Discover Chief Operating Officer Roger Hochschild. The biggest impact is on those subprime issuers, those who rely on high fees and repricing.
CHALLENGES AT CITI, B OF A, CAPITAL ONE
Analysts see greater hurdles ahead for Bank of America, the second-largest Visa card issuer; Citigroup, the largest issuer of MasterCard-branded cards; and Capital One Financial Corp.
The companies grew at a fast pace in recent years by flooding Americans' mailboxes with preapproved cards with no fees and promotional interest rates.
Yet FBR's Valentin said that model depended on the banks' ability to change rates quickly, based on their perception of how risky their customers were.
With the new law making it more difficult to do that, banks have anticipated they will raise interest rates across the board and add some fixed fees, making cards less attractive to subprime borrowers.
In addition, Bank of America and Citigroup's dependence on federal bailout money -- each has taken $45 billion -- may keep a lid on their expansion plans.
Bank of America and Capital One declined to comment.
It is premature at this stage to comment on how the credit card business model will change, Citigroup said in a statement, and potential industry adjustments and lenders' ability to provide access to affordable credit will also depend on how the economy fares.