A Bank-Friendly Bankruptcy Law?

Lenders ultimately are going to benefit from the tougher standards. But they may be hit by lots of filings first

New U.S. legislation that makes it tougher for individuals to declare bankruptcy doesn't go into effect until late October. But financial-services companies are already talking about its effects in their earnings forecasts.

The general consensus: New, more stringent standards U.S. consumers must meet to file for bankruptcy and rid themselves of debt will be positive for many lenders' earnings in the long term. That may be preceded by short-term woes, warns Evan Momios, large-cap bank analyst at Standard & Poor's Equity Research Services.

"We believe the prime beneficiaries of this new law are the banks with consumer-finance exposure, either banks with large consumer-lending portfolios or credit-card issuers," Momios says. "That's why they've been lobbying for this law for decades." However, he adds, because the law doesn't take effect for six months after President Bush signed it on Apr. 21, some consumers may rush to file for bankruptcy now, while they still can do it under less onerous terms.

EXTRA FUNDS. Big credit-card issuers clearly agree with Momios' assessment of a short-term negative. On Apr. 26, American Express (AXP ; S&P investment rank 3 STARS, hold; recent price, $52) executives said the new law would probably have a negative impact in its first year but would turn into a net positive in the following years. Other lenders have made similar statements.

Momios believes the biggest beneficiaries of the new bankruptcy standards are likely to be Citigroup (C ; $47), Bank of America (BAC ; $45), MBNA KRB ; $19), and Capital One Financial (COF ; $72). He notes that his 5 STARS, or strong buy, ranking on these four stocks is based on much more than his analysis of any potential benefits arising from the new bankruptcy law.

According to Momios, bankruptcies have accounted, historically, for only between 10% and 20% of the amount financial outfits report for "charge-offs" -- loans that are written off as bad-debt expense. He adds that all the likely affected companies have set aside extra reserves for any short-term rise in bankruptcy filings before the new law takes effect.

IT'S THE ECONOMY. Moreover, Momios sees benefits only for financial-services companies that make unsecured loans. Auto lenders, whose loans are secured by the automobile, are less likely to benefit from this law, in his view. AmeriCredit (ACF ; 4 STARS, buy; $24), which primarily makes secured auto loans, specifically said in its Apr. 26 earnings release that it did not expect to be affected by the new law.

One final caveat: Momios emphasizes that his forecasts are contingent on a stable U.S. economy. "We cannot view this new law in isolation," he says. "The main driver of bankruptcies is the employment situation. If job statistics continue to get better, fewer people are likely to file -- with or without the new law. But the benefits I'm forecasting for lenders could be offset by a weak economy."

Piskora is a senior editor of Standard & Poor's weekly investing newsletter, The Outlook

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.
Standard & Poor's Regulatory Disclosure

Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.

BW MALL SPONSORED LINKS

Solar Stock Pick - EVSO Solar Energy Growth Investment. Stocks, Trading, Investing. Alternative Energy.
Get Your No Hassle Business Loan Quote With a ForwardLine business loan you could be approved in days and have your money in about a week.
Buy Foreclosures & Use Our Money. Split Big Profits! You Find it & We Fund it! Co-Own Or Cash Out! Get Free Info Now!
What's Your Credit Score? A good credit score is between 700-750. What's yours? See it instantly and online for $0.
Explore Humana's Medicare Supplement plans. Predictable Costs! More Freedom! Greater Flexibility! Enroll Now: It's Easy

Buy a link now!

Get BusinessWeek directly on your desktop with our RSS feeds. XML

Add BusinessWeek news to your Web site with our headline feed.

Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.

To subscribe online to BusinessWeek magazine, please click here.

Learn more, go to the BusinessWeekOnline home page