The Wall Street Journal-20080201-Slowdown- MasterCard Is Feelin- No Pain
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Slowdown? MasterCard Is Feelin' No Pain
Full Text (787 words)Forget about gold and platinum. One part of the credit-card industry is dazzling investors with Teflon.
A huge profit jump reported by MasterCard Inc. yesterday showed how much the slowdown in consumer spending is dividing credit-card companies into haves and have-nots. While card issuers like banks face deepening trouble from customers who can't pay their bills, MasterCard and rivals that process electronic transactions still are raking in blockbuster profits from the global shift to plastic and away from cash and checks.
"Consumers are pulling out their debit or credit cards with increasing frequency," MasterCard President and Chief Executive Robert Selander said in an interview. Even though some recession-fearing consumers are curbing spending on discretionary items like furniture and jewelry, most consumers will keep paying with plastic "regardless of what happens" with the economy, he said.
And since an estimated 75% of the Purchase, N.Y., company's revenue comes from flat payment-processing fees that are paid by merchants and card issuers, leery consumers don't hurt MasterCard as long as they keep buying staples such as gas and groceries.
"For MasterCard, the incremental profit for a steak purchase versus bologna is not that material," Tien-tsin Huang, a J.P. Morgan analyst told clients in a research note this week. MasterCard said yesterday that gross dollar volume, a measurement representing the amount of money spent using cards with the MasterCard logo, rose 15% to $634 billion in the latest quarter from a year earlier. The company processed 5.2 billion transactions, up 17% from 2006's fourth quarter.
"We continue to stress MasterCard as an unusual combination of growth and safety as the secular global payment trends trump U.S. consumer concerns by a large margin," UBS analyst Adam Frisch wrote in a report issued after MasterCard's surprisingly strong earnings report.
MasterCard shares rose 9.5%, or $18, to $207 in 4 p.m. New York Stock Exchange composite trading. After slipping recently because of concerns about the economy, the stock has rebounded to within 6% of its all-time high, reached in December. MasterCard went public at $39 a share in May 2006.
The results bode well for larger payment processor Visa Inc.'s pending initial public offering, expected to be one of the largest in U.S. history. The San Francisco company hasn't set a date or price yet, but it is widely expected to take place by the end of March. Visa now operates as a cooperative that is owned by thousands of financial institutions.
MasterCard and Visa own their respective card brands and the networks that zap credit- and debit-card transactions. Banks and other financial institutions set interest rates on the cards, collect late fees and bear the brunt of cardholders who fall behind.
For card issuers, fourth-quarter results were ominous. After years of unusually pristine credit quality, many financial institutions now are setting aside ballooning reserves for card balances that are unlikely to be repaid. J.P. Morgan Chase & Co., the second-largest U.S. bank in stock-market value behind Bank of America Corp. and one of the biggest card issuers, expects defaults to rise to 4.5% of total outstanding card loans by mid-2008. Washington Mutual Inc. said it expects losses on its credit cards to rise to 8.5% to 9.5%.
American Express Co. and Discover Financial Services Co. also operate proprietary processing networks for their cards and those issued by other banks. Last week, AmEx reported a 26% jump in net income for its card-processing unit during the fourth quarter. But a significant decline in December spending and more money set aside for loan losses on the cards it issues resulted in a 9.9% overall profit decrease.
The Commerce Department yesterday confirmed the dour climate facing card issuers, reporting that consumer spending rose just 0.2% in December after climbing a revised 1% in November.
MasterCard's fourth-quarter profit increased to $304.2 million, or $2.26 a share, in the latest quarter, from $40.9 million, or 30 cents a share, a year earlier. The results included a $185 million gain, or $1.37 a share, from the previously announced sale of its stake in Redecard SA, a card processor in Brazil. Revenue jumped 28% to $1.07 billion.
The company also is generating big profits from cross-border transactions, collecting bigger fees when a card issued in one country is used in another country than when the card is used in the same country where it was issued. Mr. Selander predicted that "overall growth in cross-border activity will remain quite robust."
While revenue growth is expected to slow, Mr. Selander said it still is likely to increase by a double-digit percentage this year. He reminded analysts that MasterCard posted transaction growth during the economic downturn of 2001. Since then, the pace of card acceptance among merchants has grown, particularly among fast-food restaurants.
