Consolidation and Changed Product Offerings Within Lending Businesses Are Among the Results of Economic Turmoil and Subsequent Legislation and Regulation, Industry Analyst Says

• On 4:36 pm EDT, Wednesday August 26, 2009

67 WALL STREET, New York - August 26, 2009 - The Wall Street Transcript has just published its Consumer Finance Report offering a timely review of the sector to serious investors and industry executives. This 30 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Weak Growth -- Spending Volumes -- Legislative Changes -- Credit Industry -- Bank Regulations -- Stabilization and Restructuring -- Credit Availability -- Future Profitability -- Pawn Industry -- Consumer Credit Quality -- Working Through the Deleveraging Process

Companies include: Visa (V); Mastercard (MA); Capital One (COF); Discover (DFS); American Express (AXP); SLM Corp. (SLM); Cash America (CSH); Dollar Financial (DLLR); Advanta (ADVNB); CIT (CIT); SLM (SLM); CapitalSource (CSE); NewStar Financial (NEWS); AmeriCredit (ACF); H&R Block (HRB); Portfolio Recovery Associates (PRAA)

In the following brief excerpt from just one of the 5 detailed interviews in the 30 page report, industry analyst Moshe Orenbuch, Managing Director at Credit Suisse, discusses the outlook for the Consumer Finance sector and picks high return stocks with sustainable dividends for investors in this industry.

TWST: With all the turmoil in the economy, has the landscape for consumer lending companies changed dramatically?

Mr. Orenbuch: Yes. It's changed in every category of lending. The credit card has had record levels of losses. There is record weak growth and spending volumes are declining. And there are prospective changes on the pricing side over the course of the coming nine to 12 months.

TWST: Does this mean that longer term, industry growth as well as margins are going to be slower?

Mr. Orenbuch: I think it certainly means margins will be lower, and I think for the next several years, it probably means that industry growth will be slower and likely negative. The legislative changes will make it such that some accounts aren't nearly as profitable, and therefore those customers won't be targeted. In a piece we wrote several weeks ago, we said that we thought that you could probably end up with a 5% smaller business in credit cards just because of less teaser rate marketing and perhaps as much as another 10% reduction from the lower end of the business where it's much tougher to price those customers effectively.

TWST: What are companies doing to adjust to this changed environment?

Mr. Orenbuch: There has been some degree of pricing increases so far, although it's been fairly moderate up until this point. I would argue that you will see a higher level of those pricing changes, and possibly even the return of annual fees, particularly on rewards accounts, over the course of the next six to nine months.

TWST: Would you discuss the effect of the legislation on commerce?

Mr. Orenbuch: From a credit card standpoint, there is a piece of this legislation that requires a study of interchange rates. It requires a study of the fees that are being assessed to credit card customers. I don't know if that requires other legislation, but it will have an additional impact next year. There are also two bills with respect to interchange in front of Congress that could limit that piece of the revenue stream. It's important to point out that that type of bill has been in front of Congress before. It hasn't passed, so it's not a foregone conclusion, but it's certainly out there as another risk of lower revenues. On top of that, the Obama Administration's plan for the financial services industry is to create a regulator - separate from the existing regulatory structure - to protect the consumer. That is a big change and I think probably portends more regulations.

TWST: Longer term, do you think these changes will lead to consolidation and a significant change in product offerings?

Mr. Orenbuch: Significant consolidation is already underway. I would say the industry could actually use some fragmentation. If it develops that everybody prices the same, it could allow certain companies to spring up, much like the monolines did in the early 1990s, and create a new business model. That's not a certainty, but it is a possibility.

TWST: So some fragmentation could push people to seek other ways of doing business?

Mr. Orenbuch: Yes. We touched on the current shrinkage in the business - how bad it is and how bad it's likely to get. Credit lines have been cut to the mid-teens, to about 16%, and probably will end up being cut about 20% to 25% over the cycle. That's a significant reduction. It's hard to know exactly how many of those are lines to people who are using or expect to use those lines as opposed to lines that were sitting unutilized. But that's a pretty big number and it's unprecedented. Credit card spending has declined at a pace that I don't think we've seen in the history of the credit card industry.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 30 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

Buzz up!