Rising Credit Card Use May Be Mixed Blessing (MA, V, AXP, COF, DFS, BAC, JPM, C)

MasterCard Inc. (NYSE: MA) absolutely crushed estimates this morning, reporting third-quarter EPS of of $5.63 on revenue of $1.82 billion. Consensus estimates were aiming for EPS of $4.81 on $1.7 billion in revenue. The company processed nearly 21% more total transactions and revenue from debit card transactions rose 23%. While more transactions and higher spending are good for the card companies, they could raise a caution flag for future delinquencies and defaults.

Other card issuers pretty much set the stage for Mastercard. Visa Inc. (NYSE: V) reported EPS of $1.27 on revenue of $2.38 billion, beating expected EPS and narrowly missing revenue estimates. A week earlier, American Express Co. (NYSE: AXP) posted EPS of $1.03, topping estimates of $0.96. Both Visa and American Express noted transaction growth and higher consumer spending. Capital One Financial Corp. (NYSE: COF) also beat EPS and revenue estimates in the third quarter. Discover Financial Services (NYSE: DFS) winds up its 2011 fiscal year this month, and is expected to report EPS of $0.91 on revenue of $1.81 billion.

Credit card lenders including American Express, Capital One, Discover, and banks like Bank of America Corp. (NYSE: BAC), JP Morgan Chase & Co. (NYSE: JPM), and Citigroup Inc. (NYSE: C) reported a slight rise in delinquencies for September although write-offs fell. American Express’s delinquency rate rose from 1.4% in August to 1.5%, but write-offs fell from 2.7% to 2.4%. Capital One’s delinquency rate rose from 3.43% to 3.65%, while write-offs fell from 4.1% to 3.9%.  Discover’s delinquency rate rose fractionally, and its write-off rate fell from 3.6% to 3.17%. The banks followed the pattern, but write-off rates are higher, with BofA at 5.99%, Chase at 4.13%, and Citi at 5.87%.

The concern is that the uptick in credit card use will lead to a similar uptick in delinquencies and defaults. Credit card use far outstripped debit card use last quarter, indicating either that consumers didn’t have the cash or that they were voting against the threatened imposition of fees for debit card use.

High unemployment and stagnant wages are the likeliest causes of the increase in credit card use. Now that the holiday season is truly with us, consumers will be spending more and it’s not much of a stretch to believe that credit cards will play a significant role in that spending. Paying the bills will come later.

For Mastercard and Visa, neither of which is exposed to non-payment of credit card bills, delinquencies and defaults may take a longer time to affect earnings, but if banks are forced to tighten requirements, fewer credit and debit cards will be issued and the transaction companies will feel the pinch.

Mastercard shares are up about 8% in the first hour of trading this morning, at $361.36, in a 52-week range of $215.00-$364.80. Visa shares are up more than 2.5%, at $92.34, in a 52-week range of $66.50-$95.87. American Express stock is up more than 2.5% as well, at $50.23, in a 52-week range of $41.25-$53.80. Discover shares are up nearly 2%, at $23.30, in a 52-week range of $17.84-$$27.92.

Paul Ausick