Are Credit Cards The Next Subprime?

Last week the Fed said that credit card delinquencies hit 4.86% and credit debt increased by 7.9% to $957.2 in March. American Express [[axp]] is experiencing mounting credit losses but today reassured investors that it still expects annual profit to increase by 4%-6%. Companies like Visa [[v]] and Mastercard [[ma]], which shoulder very little credit exposure, have been reporting excellent earnings growth.

This explosive growth in credit card spending seems intrinsically tied to the rising costs of bare necessities like food and oil and the diminishing financial resources that US consumers have to cover these costs. Basically, if they don’t have the money to buy these basic items, they put them on their credit card.

In the short-term, this added credit card spending will boost these credit card companies’ incomes, but what will happen when consumers get stretched too thin and can’t pay off these loans?

American Express has set aside $1.27 billion this quarter to cover the write-offs of debt defaults, the biggest chunk was set aside by the US division at $881 million, up 52%. Mastercard and Visa will have less to worry about as they have far less debt exposure. And in the end, a lot of the problem could fall on banks already struggling with the last big thing - subprime.

Lehman Brothers [[leh]] continues to hog the headlines in its struggle to rid itself of its risky positions. It said it has already sold $100 million of these assets and is closing down some of its prop-trading divisions. Just as others before them, Lehman is saying it has enough capital and has not needed to access the Fed’s discount window. There is also speculation that Lehman may be buying back some of its own shares, although hedge funds with a short position are working hard to “break the bank”.

In the end what happens to banks like Lehman Brothers, Citibank [[c]], Bank of America [[bac]], UBS [[ubs]] & Merrill Lynch [[mer]] with major credit exposure will depend a lot on the economy, the consumer, and of course how much taxpayers’ money gets spent to keep them all making money.

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