Wednesday, 23 July 2008

Credit Crunch Alive and Well

Yesterday produced evidence that the tentacles of the credit crunch are contniuing to spread. The latest victim is American Express (AXP) which is seeing losses climb on credit cards and is forecasting a gloomy near term outlook. From

American Express reports 38% drop in net income
Credit card company says it won't meet targets until economy improves

American Express reported a 38% drop in second-quarter earnings Monday and warned that it won't be able to meet long-term financial targets until the economy improves.

The credit card company said that even its most creditworthy, long-standing customers felt the effects of the economic slowdown that's currently sweeping the U.S.

Without giving specifics, AmEx said it plans to cut staff and reduce other costs, noting that the resulting charges will will hit results in the second half of 2008. American Express shares fell 11% to $36.56 in after-hours trading following the report.

"With bad debt occurring even in the superprime card segment, AmEx's earnings clearly show that the credit crisis is going upscale, which does not bode well for the U.S. economy," Red Gillen, a senior analyst at consulting firm Celent, commented via an email exchange.

American Express is known for catering to wealthier customers, so some investors expected the company to withstand the economic slowdown relatively well. However, Gillen noted that richer clients were often given cards with bigger credit lines. Now that some of these customers are missing payments, the losses are bigger, he said.

American Express said second-quarter net income came in at $653 million, or 56 cents a share, vs. $1.06 billion, or 88 cents a share, the same period a year earlier.

The latest results include $600 million that the company added to reserves to cover bad loans in the U.S., the company said. There was also one other $136 million charge and a tax benefit of $101 million.

Of course this was all too predictable. The credit implosion that started with subprime was always going to spread to credit cards, auto loans and commercial real estate.

Also banks are still losing money hand over fist and the analysts don't have a clue how bad it is. Consider Washington Mutual's (WM) latest results today.

WaMu reports $3.33 bln quarterly net loss

...WaMu's (WM) net loss in the second quarter came to $6.58 a share. That compares to net income of $830 million, or 92 cents a share, a year earlier. Excluding one-time items, the lender said earnings per share would have been $3.34 in the second quarter....

....WaMu was expected to lose $1.05 a share, according to the average estimate of 12 analysts in a Thomson Reuters survey...

Only a miss of $5.53 a share, not to worry. In addition, Moody's is thinking of downgrading the stock. On to Wachovia (WB)

Wachovia jumps 30%; CEO says won't sell stock

Wachovia Corp shares, rebounding from double-digit losses in the previous session, soared almost 30% after the bank said it would work its way out of a credit quagmire without diluting current shareholders' stake in the company....

....Wachovia said it would again pare the dividend after it posted a loss of $8.86 billion, or $4.20 a share, for the second quarter, compared with profit of $2.34 billion, or $1.20, in the year-earlier period.

On an adjusted basis, the latest loss was $1.27 a share; analysts polled by FactSet Research had expected a loss of 71 cents a share.

The firm added $5.6 billion to its loan-loss reserve to cover net charge-offs and to increase the reserve by $4.2 billion.

The bank's dividend -- which had been raised three times since 2005 -- is being reduced to 5 cents a share, saving $700 million of capital per quarter. In April, Wachovia cut its quarterly dividend to 37.5 cents a share from 64 cents a share.

Another miss of more than 50 cents a share and the dividend all but eliminated. However, one analayst went out on a limb.

"We think Wachovia's poor second quarter 2008 should mark a bottom," Deutsche Bank analyst Mike Mayo wrote in a research report after the report.

Oh goody another bottom call. The stockmarket rallied on the news and sent bank shares considerably higher. The stockmarket is calling a bottom in financials, you see the worst is over. However for those of us who have been paying notice, we've seen this movie before and it doesn't end well.

P.S I am currently on holidays for a month and doing a bit of travelling in Australia so Blogging may be intermittent for a while.