Card firms’ consumer woes grow

Credit card companies American Express Co. and Capital One Financial Corp. on Wednesday disclosed deepening woes from the growing failure of consumers to repay their debts.

American Express, the third-largest U.S. credit card network, said that it would take a fourth-quarter charge of $275 million to cover rising customer defaults and that earnings this quarter would fall below what analysts on average had estimated.

Shares hit a 52-week low of $46.57 on Thursday before rebounding to close at $48.92, down 16 cents. They lost as much as 7% in after-hours trading.

The company, based in New York, said first-quarter earnings from continuing operations would be less than 90 cents a share, missing the 93-cent average estimate of analysts surveyed by Bloomberg.

American Express adopted a “cautious view” for 2008 after cardholder spending slowed and delinquencies rose in December amid a slowing U.S. economy, the company said.

“We did see some negative credit trends among U.S. consumers during December, particularly in California, Florida and other parts of the country most affected by the housing downturn,” Chief Executive Kenneth Chenault said.

Write-offs, or loans the company deemed uncollectable, rose to 4.3% in the fourth quarter from 3.7% in the third, the company said. It expects them to rise to 5.1% to 5.3% this year.

Chief Financial Officer Daniel Henry said loan repayment rates worsened “quite suddenly” in December, leading to the change in 2008 estimates. The weakness was isolated to U.S. consumers, not overseas or business spenders, he said.

Henry had told analysts in October that the company’s “affluent and high-spending” cardholders sheltered the company from the problems of borrowers with the riskiest credit histories.

Capital One said fourth-quarter profit was 44% below analysts’ estimates. Its operating profit was about 85 cents a share, compared with the $1.52 average estimate of analysts.

The decline was caused by $1.9 billion of loan-loss provisions and $80 million in legal reserves, according to the company, based in McLean, Va.

Shares hit a 52-week low of $38.85 on Thursday before rising to close at $42.92, down 43 cents.

Capital One said it might have $5.9 billion in unpaid loans this year, compared with an earlier forecast of $4.9 billion to the “mid-$5 billions.”

“It’s another bank in the negative credit-market slipstream,” said Howard Wheeldon, a senior strategist at London-based brokerage BGC Partners.

“The outlook for bad loans remains grim.”

The company, which spent $1.4 billion in marketing in 2006, lowered its full-year 2007 profit estimate to $3.97 a share from about $5. It posted an $81.7-million third-quarter loss, the first since 1994, after closing its mortgage business and cutting 1,900 jobs.

The slowing economy has reduced borrowers’ ability to repay credit card and auto loans, Capital One said.

“Credit card performance will noticeably deteriorate during the year, given spillover from residential mortgages, weaker economic trends and higher levels of unemployment,” Fitch Ratings said Wednesday in a report on the U.S. industry.

Government reports in the last two weeks showed that home sales fell to the lowest level in 12 years and that the unemployment rate jumped to a two-year high of 5% in December. Personal bankruptcy filings in the U.S. rose almost 40% in 2007, according to the National Bankruptcy Research Center.

Fallout from the collapse of the U.S. sub-prime mortgage market has led to more than $97 billion in write-downs and loan losses at the world’s largest financial companies and a 6.8% drop in the Standard & Poor’s 500 index since the end of June.

Visa Inc. and MasterCard Inc. operate the two biggest card networks by transactions processed. Discover Financial Services, the No. 4 company, and American Express, are lenders that offer cards as well as run networks.

Merrill Lynch & Co. analyst Kenneth Bruce last month recommended investors sell shares of American Express, Capital One and Discover Financial Services, predicting that consumer spending would deteriorate this year.