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MasterCard Struggles as Credit Crisis Hits Card Companies

By , Contributing Writer, Money Morning •

By Don Miller
Associate Editor
Money Morning

MasterCard Inc. (NYSE: MA), the world's second-largest electronic payments network, reported an 18% decline in profits in the first quarter. The company also said projected revenue growth this year will fall short of its goals, as the strong dollar reduced overseas revenue and credit card spending fell.

MasterCard's first-quarter net income dropped to $367.3 million, or $2.81 a share, from $446.9 million, or $3.38, a year earlier, the Purchase, New York-based company said in a statement. The results beat the $2.62 average estimate of analysts in a Reuters survey.

Revenue declined 2.2% to $1.2 billion from a year earlier because of "the unfavorable impact of foreign currency exchange," the company said. The gross dollar volume on credit- card transactions around the world declined 15% to $369 billion.

Chief Executive Officer Robert Selander is cutting advertising and marketing expenses to reach profit targets. The company, which collects fees to transfer payments between financial institutions, will have a "tough time" making its goal of 30% net income growth. Selander announced a hiring freeze in November.
"As we navigate through these challenging economic times, we've taken important steps to better align our operations with the current environment," said Robert W. Selander, MasterCard president and chief executive officer. "We've taken considerable cost-reduction actions allowing us to deliver a strong operating margin of 48.6%, while keeping focused to ensure MasterCard is well positioned for long-term growth."

The credit card processor is the latest in a long line of credit card issuers to report problems arising from consumer belt-tightening and outright defaults.

American Express Co. (NYSE: AXP) said last week that first-quarter profit plunged 58%, as its U.S. card unit posted a $25 million loss. Capital One Financial Corp. (NYSE: COF), posted a $111.9 million first-quarter loss and Bank of America Corp. (NYSE: BAC) the largest U.S. lender by assets, reported a $1.77 billion first-quarter loss in its credit-card services unit.

Charge-offs, or loans deemed uncollectible are surging as banks give up on cardholders who are no longer paying their bills. Charge-offs rose to 8.5% in the quarter at AmEx, almost double last year's rate. At Capital One, loan losses in 2009 will exceed $8.6 billion and the rate will "cross 10% in the next couple of months," Chief Executive Officer Richard Fairbank said recently in a conference call.

Notably immune from the latest carnage was Visa Inc. (NYSE: V), which beat Wall Street earnings expectations earlier this week reporting second-quarter profits that climbed 71% to $536 million as consumers used more debit cards to make purchases.

Visa, the largest credit card network, controls three-quarters of the U.S. debit market by dollar volume. Debit growth offset a drop in credit-card use, the company reported, as it reaffirmed it expects meet earnings growth estimates of 20% this year.

The profit reports were released just as a package of new protections for credit card users heads to the Senate for a vote next week. The bill passed overwhelmingly in the House of Representatives Thursday. 

The Credit Card Holders Bill of Rights Act of 2009 is certain to increase the heat on credit card issuers after legislators were inundated with a barrage of complaints about what critics are calling arbitrary and burdensome practices.  Some of the banks are under fire for taking funds from the Troubled Asset Relief Program (TARP) and then raising fees and interest rates on the very taxpayers who lent them the money.

The provisions of the bill would require card issuers to provide a 45-day advance notice of interest rate increases, prohibit so-called double-cycle billing where interest is charged on payments processed the previous month, and a limit on retroactive interest rate increases.  

MasterCard, like Visa, is not as vulnerable to the credit crisis because it processes transactions as opposed to actual lending funds. But the company is still subject to a slowdown in revenue growth and transaction volumes as weary consumers access their credit cards less.

"Declines in card spending reported by banks in the first quarter as a result of the global economic slowdown" may pressure MasterCard's transaction volumes, David Hochstim, an analyst at Buckingham Research Group in New York, told Bloomberg News. He has an "accumulate" rating on the company.

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