Credit analyst: Providian has no glaring liquidity problems but delinquency rates high

By Ronda Fears

Nashville, Nov. 18 - Kathy Shanley, senior bond analyst at Gimme Credit, noted that shares of Providian Financial (B2/B) trended up last week as HSBC's agreement to buy Household International fueled speculation the sub-prime credit card sector might be attractive to potential acquirers looking for bottom-fishing opportunities.

"Providian is concentrated in sub-prime credit cards, despite a recent attempt to shift the mix of its lending portfolio to include more prime accounts. Credit losses and delinquencies remain stubbornly high, suggesting it may be premature to view Providian as the next takeover target," Shanley said in a report Monday.

"We don't see immediate liquidity issues at Providian, but would continue to avoid this credit, given the delinquency trends. Providian's third quarter results show some signs of progress, but it is still unclear whether loss trends are starting to turn."

Many of the initial restructuring tasks are now complete, she said, since in third quarter the company transferred the servicing of the Providian Master Trust to Chase and in October moved servicing of a high risk portfolio of credit card receivables to Cardholder Management Services.

New account originations in third quarter totaled 520,000 and Providian claims about 40% of the new accounts it is booking qualify as prime with about 60% identified as "middle."

"The shift in mix may benefit Providian's loss trends over time, but so far there is little evidence of improving performance," Shanley said, noting Providian's managed net credit loss rate increased to 17.1% in September from 16.3% in August and the 30-plus day managed delinquency rate edged up to 11.2% from 10.9%.

The company says the spike in the loss rate in September reflects a temporary suspension in the sale of charged-off assets and that losses are expected to decline in October.

"The trend in delinquencies can't be explained by any such technical factors, however, suggesting the weak economy and slower growth in receivables will continue to weigh on Providian's performance for at least the near-term," Shanley said.

She added that several regulatory issues are unresolved, including the question of how the soon-to-be released FFIEC guidance on accrued interest and account management practices will affect capital.

At Sept. 30, bank-level ratios were above the "well-capitalized" minimum, meaning Providian is not restricted from accepting brokered deposits.

Access to brokered deposit channels remains limited, however, with only $104 million raised between the beginning of May and the end of September, she said.

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