Peter C. Beller, 03.16.09, 08:35 PM EDT
The charge card that symbolizes wealth and taste is suffering from rising delinquencies.
Membership may have its privileges but it also comes with a bill that more and more can't afford. American Express, the credit card company that prides itself on steering clear of deadbeats, is seeing a higher percentage of its customers defaulting on their debt, according to numbers released Monday.
The company's net write-offs climbed to 8.7% in February, a big jump from the beginning of the year, when the number was 7.5%. Things may not get better soon: the portion of customers more than 30 days behind on their payments also jumped, to 5.3% from 4.7%.
Shares of AmEx fell 43 cents, or 3.3%, to $12.66 on Monday helping to bring a four-day rally in U.S. markets to a grinding halt. The S&P 500 fell 3 points, or 0.4%, to 754. The Dow Jones industrial lost 7 points, or 0.1%, to finish at 7,217.
The new AmEx figures, released in a regulatory filing, show that the recession, which has raised the unemployment rate and depressed consumer spending, is hitting blue-chip lenders as well as companies that thrive on lower credit quality. U.S. gross domestic product fell by an annual rate of 6.2% in the last quarter of 2008. Consumer spending, the largest contributor to GDP, dropped at an annualized rate of 4.3% in that period.
Sales at American Express rose slightly last year, to $28.4 billion from $27.6 billion in 2007, but net income plummeted by a third, from $2.7 billion to $4.0 billion, which the company's managers blamed on the financial crisis and subsequent recession. AmEx stock is off 69% in the past year. The firm's biggest shareholder is Warren Buffett's Berkshire Hathaway (nyse: BRK.A - news - people ), which owns 152 million shares, or 13.1%. AmEx CEO Kenneth Chenault was paid a total of $27.3 million last year, up slightly from 2007 but down from 2006, according to a proxy filing released Monday.
Not all credit card issuers had such a bad Monday--at least when expectations are taken into account. Capital One Financial (nyse: COF - news - people ), one of the largest issuers of Mastercard (nyse: MA - news - people ) and Visa (nyse: V - news - people ) cards, said its net charge-off rate for U.S. credit cards rose to 8.1% in February from 7.8% in January. The rate for loans at least 30 days delinquent increased to 5.1% from 5.0%. Wall Street evidently thought better of Capital One: shares of the lender rose 4.5% after the announcement before being brought down by the broader fall in the markets to finish up one cent at $12.57.
The results may have been better than expected, noted David Long, an analyst at William Blair, but the company's forecasts could mean worse results in the future. In January Capital One told investors to expect $8.6 billion in charge-offs its year based on the unemployment rate peaking at 8.7%. The U.S. Labor Department said the unemployment rate rose to 8.1% in the month of February, its highest level in 25 years. (See "The Depressing Truth About America's Economy.")
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"My view is the unemployment level will exceed that, and the charge-off rate will follow," Long said. "The way I look at consumer credit, labor data is the best proxy for whether or not consumers can pay bills."
Results in other lines of business were mixed for the firm. Capital One's charge-off rate for auto loans fell to 4.4% in February from 6.1% in January, while the delinquency rate decline to 7.5%, from 9.2%. In international operations, the charge-off rate rose to 7.2% in February from 6.1% in January, while the delinquency rate increase to 6.2%, from 5.8%. Earlier this month, Capital One announced plans to cut its quarterly dividend 86.7%, to 5 cents a share, from 37.5 cents a share, beginning in its second quarter, which will result in a May payout. (See "Capital One's Slain Dividend.")
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