01/27/2012

Amex, Discover Take Stock of Funding Costs

A shift in funding expenses could prompt American Express and Discover to increase their output of credit-card bonds this year.

The expectations hinge on an increase in what the companies pay to raise capital by issuing certificates of deposits, coupled with a decrease in securitization costs. According to Moody’s, those expenses are now roughly equal for banks without retail branches — that is, institutions like Amex and Discover that don’t keep deposits in traditional savings accounts.

The upshot is that those operations are likely to select fresh securitizations to re-fund a greater proportion of outstanding card bonds as they come due. In 2011, Amex rolled 41% of its maturing card bonds into new deals. Discover took the same step for 74% of its obligations.

Even if they remained at those percentages, Amex and Discover would produce more credit-card bonds this year. That’s because both companies face an increase of roughly 25% in the total dollar volume of card paper they have coming due in 2012 — Amex to $7.1 billion and Discover to $5.4 billion.

American Express sold $2.3 billion of credit-card bonds last year, up from $1 billion in 2010. Discover kicked in $3.2 billion of fresh offerings, up from $1.4 billion.

Like other issuers, both lenders were more active before the 2010 implementation of the Financial Accounting Standards Board’s FAS 166 and 167 rules eliminated off-balance-sheet treatment for banks’ securitized assets. Without that benefit, banks found it more cost effective to tap into growing deposit bases for funding.

However, players like Amex and Discover that hold savings in CDs or brokered deposits have found themselves paying higher interest rates lately as they aim to draw customers away from banks with brick-and-mortar branches. At the same time, spreads on credit-card bonds have been narrowing.

While the pattern has been playing out for a while — helping to explain the lenders’ increased securitization volume in 2011 — it was only recently that the differential vanished. For instance, a senior five-year class of Discover’s most recent securitization sold Nov. 15 at 35 bp over one-month Libor, compared to 58 bp for a similar batch of securities placed in September 2010. That puts the latest deal about on par with what it costs the lender to take deposits.

Even as market-wide interest rates on new CDs have fallen in the past year, “direct-marketing” banks have seen average annual yields on their CDs and brokered deposits rise to 2.6% from 2.5%, according to Moody’s. Meanwhile, large commercial banks such as Bank of America, Citigroup and J.P. Morgan pay average interest rates of 0.35% on their deposits. That helps explain why they’ve continued to re-fund only a small proportion of their maturing credit-card bonds via securitization.

BofA hasn’t issued credit-card bonds since May 2010. Citi replaced 14% of its maturing card securities with fresh asset-backed paper last year, with J.P. Morgan taking the same step for 13% of its deals.

All told, $64.4 billion of credit-card bonds are scheduled to come due in 2012, compared to $60 billion in 2011. Citi accounts for more of this year’s total than any other issuer, with $18.7 billion of maturities. It’s followed by J.P. Morgan at $12.75 billion and BofA at $8.5 billion. Among private-label card lenders, Target faces $1 billion of maturities. Nordstrom follows with $500 million.

Moody’s projects that total issuance of credit-card bonds in the U.S. this year will amount to $10 billion to $15 billion. That’s roughly equal to the 2011 count of $12.6 billion, according to Asset-Backed Alert’s ABS Database. Along with more deals from Amex and Discover, the tally could be supported by increasing credit-card balances. Moody’s is predicting that U.S. borrowers will end this year owing 6% more than at the end of 2011, snapping a three-year streak of decreases.

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