Earnings Quality And Credit Cards

Minyanville Peter has done a great job of digging into numbers at Target. It looks like credit card lenders have in essence become the consumer lenders of last resort and on top of this Target (and others) are getting creative ( I assume this is nothing new) in putting aside lower loss provisions to make their latest number. But why should they act in a different way than lots of banks.....? This move in the face of the coming recession is very shortsighted and underpins my view that the earnings quality ( not only in the US) is often "subprime". This doesn´t make the market more attractive......

Minyanville Peter hat Ihr wirklich einen tollen Job gemacht und hat sich stellvertretend für etliche Firmen die genauen Daten des Target ( nach Wal Mart die Nummer 2 in den USA) Ergebnisses angesehen. Und die zeigen zwei wenig erbauliche Trands. Zuerst bleibt festzuhalten das die Kreditkarte nach Wegfall der Immobilienrefinanzierung und anderer Kreditmöglichkeiten mehr denn je der letzte Strohhalm für den bis über beide Ohren in Schwierigkeiten US Konsumenten ist. Zum anderen wird einmal mehr deutlich wie "kreativ" (sicher nichts neues) die Firmen werden müssen um Ihre letzten Quartalszahlen zu "treffen". Immerhin haben die ja in etlichen Banken erstklassige Vorbilder (bloß das es dort um Mrd geht....). Und das ganze im Angesicht der kommenden Rezession. Sieht für mich doch extrem kurzsichtig, fahrlässig und auch offensichtlich aus. Das Pendel wird dafür in den kommenden Jahren umso stärker zurückschlagen. Einmal mehr ein Beleg für meine These das die Gewinnqualität (nicht nur in den USA) oftmals "subprime" ist. Das macht die schon jetzt nicht billigen Märkte nicht gerade attraktiver......

Minyan Mailbag: A Bird's-Eye View of the Credit Conundrum
Finally, no one is talking about it yet, but I think the market will soon begin to realize that the credit card lenders have in essence become the consumer lenders of last resort.

As consumers have been shut out of the mortgage and home equity world, the last available credit is plastic. One statistic that I have found very troubling is the degree to which credit card balance growth is running ahead of retail sales growth - a key sign that the consumer is stretched.

In normal times, you would expect aggregate credit card balance growth to run about in line with GDP and retail sales growth. This year it is running almost 2.5 times that. Clearly consumers are using their cards for far more than purchases. And my guess is that for many Americans their credit cards have become the latest, but potentially last, source of financing available.
Because of the oversized credit card balance growth, however, I think the market is missing what is really happening within card issuer portfolios – particularly loss and delinquency data. Today, no one seems to be very concerned about the increases in reported losses and delinquencies. However, when you start to normalize these statistics for the enormous balance growth we’ve seen, the increases in both are quite dramatic.
To put this all together, take Target’s (TGT) latest financial results and you can see the numbers for real. First, credit card balance growth was up 14% year-on-year - almost 1.5 times Target sales growth of 9.5%. Second, thanks to this balance growth, reported year-on-year delinquency ratios are up only a little bit (60+ days delinquencies of 3.5% versus 3.4% a year ago), but the dollars of delinquent accounts are up almost 18% - to $242 mln from $205 mln – and, as an aside, “late fees and other revenue” are up more than 36% year-on-year.

Digging even deeper, you come away with more unanswered questions. First, annualized net write-offs for the quarter were up 17% - 5.4% of loans versus 4.6% during the year ago quarter. But behind that, masked by 14% balance growth, there is a 32% increase in the dollars charged off.

Further, and to me more troubling, Target dropped its loan loss allowance from 8.3% of loans at the end of July 2006 ($501 mln) to 7.4% at the end of July 2007 ($509 mln). Had Target kept its provision at 8.3% of loans, the incremental cost would have been over $64 mln or almost 40% of the pre-tax quarterly earnings of Target’s credit card business.

Alternatively, had Target kept its provision at the same 1.8 times net charge-offs as last year (an 8.3% allowance on 4.6% in net write-offs), the required ending provision would have been over 9.7% of loans - at an incremental cost to the company of almost $144 mln – all but eliminating earnings from the credit card operation for the quarter. Put simply, when measured in dollars (rather than percentages of balances) Target’s nearly flat year-on-year loan loss allowance does not synch with the increase in loan balances, delinquencies, charge-offs, and late fees.