Consumer Loans & Credit Cards = House of Pain in 2009 ~ market folly

Tuesday, February 3, 2009

Consumer Loans & Credit Cards = House of Pain in 2009

Head of JPMorgan Jamie Dimon is not too optimistic for 2009. And, understandably so. He's right in the middle of the financial tsunami. After a year of re-shaping the industry, there is more pain ahead for financial institutions as consumer loans start to kick the financial landscape's collective ass.

Per the FT, Dimon goes on to say that,

“The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009. In terms of our sector, we expect consumer loans and credit cards to continue to get worse. When we look back at industry excesses in areas such as highly leveraged lending and securitisation, it is clear that some of these markets will never come back.”

This is clearly not good news for institutions who have been trying to weather the year-long storm. They've faced waves of a credit crisis, subprime, and leverage. Now, a whole new tidal wave is about to hit their shores: consumer loans. The economic malaise that has plagued Wall Street for some time now has also been hitting Main Street. Consumers are not only defaulting on their mortgages, but also on their car loans and credit cards.

We've harped on this issue for a while now on the blog, as the warning signs have always been there. As the consumer deleverages, their savings rate will have to rise in order to get out of this mess. One of our darling shorts from the past year, Capital One (COF), has been quietly licking their wounds, hoping the eye of the storm passes them by. Unfortunately for them, it may now be time for them to face the storm head on. Here are some highlights from December:

  • Credit Default: Annual net charge-offs were 7.71% in December, up from 6.98% in November.
  • Loans 30 days delinquent increased from 4.7% in November to 4.78% in December.
  • Auto loan segment saw charge-offs of 5.93% in December, up from 5.6% in November.
  • Auto loan delinquencies were up from 9.48% in November to now 9.91% in December.
  • International charge-offs were 6.2% in December, up from 5.17% the month prior.
  • International delinquencies rose to 5.51%, up from 5.44%

As you can see, charge-offs are rising. And, they have been for many months now. This is very problematic for a company that derives 75% of its earnings from credit card operations. As delinquencies and charge off rates continue to rise, the Economy is certainly not on their side. However, if the past is any indication, they do have the Government on their side, who has graciously given them a capital infusion in the past. Something to keep an eye on. Overall though, the environment in 2009 doesn't necessarily get any easier for financial institutions.

The credit card squeeze is upon us.

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