Thursday, January 7, 2010

US Card Challenges Ahead in 2010 Credit Suisse

We believe that the current environment faced by credit card issuers is
one of the most challenging in the history of the business. Overall, at
least three major factors conspire to reduce returns and increase risk:
(1) Credit Quality - We believe that the weak credit environment will last
longer than most investors expect. Credit will not likely begin to improve
until after a period of sustained job gains.
(2) Regulation - The effects of the CARD Act coupled with the overall
attitude in Washington regarding consumer protection will likely continue
to reduce industry revenues and profits over the next several years.
(3) Competition - The CARD Act’s restrictions on risk-based pricing
should significantly increase competition as issuers crowd into a smaller
portion of the prime segment. Accelerating mail volume will further
increase competition.

We expect few winners among the card issuers in 2010. While COF and
DFS (rated Neutral) have managed credit quality well, further increases in
credit costs combined with suppressed revenues under the CARD Act keep
us on the sidelines. Risks to AXP (rated Underperform) remain high given
the lack of debit business and future pressure on the merchant discount rate.

We view V and MA (rated Outperform) as best positioned heading into
2010. Both networks should benefit from accelerating revenue growth as
spending volumes improve as well as the ongoing secular shift from cash to
plastic payment methods.

4Q earnings driven by reserve methodologies. Among the card issuers,
we expect reserve levels to remain largely unchanged from September
despite better 4Q credit quality trends given the uncertainty in the economic
environment. Revenue margins should moderate slightly from 3Q due to less
repricing activity. In addition, we expect higher marketing expense levels and
continued balance sheet shrinkage. Currently, we modified estimates for
AXP, COF, and MA and adjusted our target price for AXP.

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