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Few companies in any industry have the earnings track record of MBNA, the largest independent credit-card issuer in the world. The Wilmington (Del.) consumer-finance company has averaged earnings growth of 25% a quarter since it went public in 1991. MBNA (KRB
) did it again on Jan. 10, posting profits of $524 million in the fourth quarter of 2001 -- or 25% growth over the year earlier.
Can MBNA stay on top? Most analysts believe it can. Starting this year, however, some expect that 25% average to slip a bit. A 12% decline in the stock price over the past year, to $35.47 on Jan. 15, reflects that concern. But long-term investors should remember that MBNA's management has seen rougher waters in the past and sailed through them, analysts say. With the recent dip in the stock, some suggest that now could be a buying opportunity.
Indeed, MBNA could conceivably avert a slowdown in profit growth if it can deftly manage its own write-offs and continue to expand, especially into Canada and Europe, two prime targets. "We have the same group of people running the company today that ran it 20 years ago," says MBNA Executive Vice-President David Spartin. "We don't forecast our earnings, but we do like to produce consistent results." In other words, management would like to send a signal that 25% earnings growth is still achievable going forward.
HIGH-QUALITY CREDIT. What's the strategy? For starters, analysts say the company's emphasis on the customers most unlikely to default gives it an advantage in the current economic environment. "MBNA is better positioned because it has better customer credit quality than many of the other lenders," says Standard & Poor's analyst Bob McMillan. S&P, like BusinessWeek Online a division of The McGraw-Hill Companies, has named MBNA one of the 35 stocks expected to be stellar performers in 2002.
In the fourth quarter, MBNA had loan losses of just under 5%, roughly even with the third quarter and about two percentage points below most other card issuers -- suggesting that even at the end of a very tough year, the struggling economy didn't have a profound impact on the company's loan portfolio.
McMillan points out that MBNA's financial health allows it to borrow money at lower rates. This increases the net margins on the credit-card loans it makes to consumers. Ongoing Federal Reserve policy helps MBNA, too. With the central bank still in an easing mode after 11 straight rate cuts the past two years, the company enjoys even lower rates on the money it borrows. That could be an important factor in keeping profits high if consumer spending regains momentum soon.
SHOPPING AROUND? This recession has been hard on many credit-card issuers. Look at Providian Financial (PVN
), which caters to people with low credit ratings. It took a hit recently with account write-offs and rising delinquent cardholder payments, and fourth-quarter earnings are expected to decline 95%, to 4 cents a share, in the company's Jan. 17 report.
MBNA can't continue delivering high earnings growth by standing still, however. Fox-Pitt Kelton analyst Reilly Tierney believes the bank's loan portfolio isn't growing fast enough to sustain profit growth at current levels. Only through mergers would MBNA be able to expand its loan portfolio significantly, he says. "MBNA is about to hit the wall on organic loan growth," predicts Tierney.
Total loans increased about 10%, to $97.5 billion, in 2001, but that's a slowdown from roughly 15% annual growth seen in previous years, says CIBC World Markets analyst Jennifer Scutti. She believes MBNA is likely to acquire more bank credit-card portfolios in the near future to maintain its profit growth.
Right now, it has about 15% of the U.S. credit-card market. The rest is owned by money-center banks, such as Chase and Citigroup, as well as independent consumer lenders including Advanta and Household International. Is MBNA looking to acquire? "If we see an acquisition that makes sense this year, we will take a closer look," Spartin says.
STING IN THE TAIL? Europe also will be a necessary growth engine for MBNA. Spartin says the company plans to expand aggressively in countries outside Britain. Together, MBNA's subsidiaries in Britain and Canada account for about 10% of total business. Spartin sees that rising to as much as 25% eventually, as the U.S. market becomes saturated with lenders and as opportunities emerge in mainland Europe.
Certainly, a lingering risk is that the company could see the tail end of last year's ugly economy come back to strike a blow. More than 2 million Americans lost their jobs in 2001, according to the Labor Dept., and layoffs are expected to continue over the next few months. That could spell more write-offs if personal bankruptcies climb.
Another downside possibility is that sooner or later in 2002 the Fed might reverse course. If Chairman Alan Greenspan sees the economy expanding again, he could vote to raise short-term rates to prevent growth from overheating. That would increase MBNA's borrowing costs and lower the net margins on credit-card loans.
Still, there are more than a few reasons to give MBNA the benefit of the doubt. After all, management continuity since its founding in 1982 is a hallmark of the company. Given the better-than-even odds that an economic recovery will solidify over the next few months, it's no wonder many analysts think MBNA has a good chance to build on the healthy returns of the past.
Shook covers financial markets for BusinessWeek Online in New York Edited by Beth Belton
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Copyright 2002, Bloomberg L.P.
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