Regulation

Getting Less Credit: Card Issuers Knocked

Citigroup's Citibank (S.D.) unit gets some downgrades from Moody's, while S&P lowers American Express.
Stephen TaubDecember 22, 2008

The growing pressure point of credit card debt in the anatomy of the global financial crisis is putting business-card and consumer-card issuers in the spotlight. And credit rating agencies don’t like what they see there.

Deterioration in the credit quality of credit card debt could further rock the economy, of course. And if business customers and consumers increasingly default on their credit card debt or use their cards less frequently, that could hurt businesses that rely on credit-card sales.

In one case, Moody’s Investors Service lowered the bank financial strength rating (BFSR) of Citibank (South Dakota), N.A. to C- from B, and also lowered CSD’s long-term deposit and senior debt ratings to Aa3 from Aa1, while affirmomg the short-term rating at Prime-1. A direct wholly owned subsidiary of Citigroup, CSD is the legal entity for Citigroup’s U.S. credit card business. And Moody’s points out that historically CSD has been a significant contributor to Citigroup’s consolidated results.

Given CSD’s strategic importance to the parent, Moody’s said the BFSR for Citibank (South Dakota) “reflects an amalgam” of Citigroup and subsidiary level attributes: qualitative factors such as risk positioning and franchise value focus primarily on the overall Citigroup enterprise; financial factors focus primarily on the financial performance; and fundamentals of CSD itself, reflecting the specialized, monoline nature of its operations.

The debt rater also said the downgrade of CDS’s financial strength rating reflects CSD’s exposure to harsh U.S. economic conditions given its complete reliance on U.S. credit cards for its earnings. “As such, CSD remains exposed to a potentially severe consumer-led economic downturn in the U.S., which makes the company susceptible to significant asset quality and earnings volatility through higher net charge-off and provisioning levels,” it added.

In addition, Moody’s said that earnings for CSD, and for the U.S. card industry as a whole, may be further pressured by potential pressure on revenues in the wake of pending regulatory changes restricting pricing flexibility; and by more expensive funding. Last week regulators approved new rules that, among other things, prevent credit card issuers from increasing interest rates on existing account balances.

In addition, Standard & Poor’s lowered its long-term ratings on American Express and its subsidiaries to ‘A’ from ‘A+’, while affirming the ‘A-1’ short-term ratings on the companies. S&P said that the actions reflect its concerns about the weakening operating environment for consumer lenders, deterioration in Amex’s credit card loan portfolio, and Amex’s wholesale funding concentration.

“The current recessionary operating environment, characterized by rising unemployment, consumer spending contraction, and overall economic weakness, has pressured Amex’s 2008 operations, as seen in reduced earnings, softer cardmember spending, and deteriorating asset quality metrics,” S&P added. It also said that it expects that economic weakness will continue through 2009, further weakening Amex’s asset quality and profitability.