Financial Services/Specialty Finance

Multi-Company Bulletin
November 27, 2001

Credit Cards 101
Complete Industry Primer
Company Name American Express Company Capital One Financial Corporation Citigroup Inc. CompuCredit Corporation MBNA Corporation Metris Companies Inc. Providian Financial Corporation Ticker AXP COF C CCRT KRB MXT PVN Rating 3 2 1 3 1 2 4 Price $34.20 $51.85 $49.60 $7.46 $32.90 $20.01 $3.57 FY EPS 2001E 2002E $1.14 $2.91 $2.82 $1.03 $1.93 $2.58 $1.76 $1.75 $3.50 $3.23 $1.15 $2.33 $3.05 $0.00 CY P/E 2001 2002 30.0x 17.8x 17.6x 7.2x 17.0x 7.8x 2.0x 19.5x 14.8x 15.4x 6.5x 14.1x 6.6x NA

Source: Company data and Wachovia Securities estimates

Key Points • We believe consolidation within the credit card industry will accelerate over the next two years due to a saturated market and competitive pressures. Accordingly, we believe those companies poised to gain market share and dominate the industry through scale and access to low cost capital will experience multiple expansion. We believe the direct beneficiary of this trend will be MBNA, the shares of which are rated Strong Buy with a $46 target price. • There are roughly 7,000 credit card issuers within the United States, but perhaps as few as less than ten companies have the scale necessary to be profitable over the long term. We believe that as companies continue to plod through this recession, financial institutions could be forced to sell credit card assets in an effort to raise cash for reserves or take gains to cushion earnings. • What will also accelerate consolidation, in our opinion, is access to capital. There is a clear delineation between those companies with affordable and liquid access to capital and those without. Generally, the companies with low risk and consistent operating fundamentals benefit, while the companies with higher risk and volatile earnings structures do not benefit. • As we assume there will be a considerable number of portfolios for sale over the near term, investors are likely to profit from focusing on which ones will prevail as the consolidator of choice. We believe such a consolidator will be MBNA. • Herein, we provide an in-depth primer on the credit card industry. Included are discussions on how credit card companies actually make money, what macro factors pressure earnings, and what Wachovia's outlook is on the long-term winners in the industry.

Meredith Whitney meredith.whitney@wachovia.com Richard Herr richard.herr@wachovia.com Douglas Sipkin douglas.sipkin@wachovia.com

(212) 891-5040 (212) 909-0984 (212) 891-5062

Rating Legend

1 – Strong Buy 2 – Buy 3 – Market Perform 4 – Underperform

This report has been prepared by First Union Securities, Inc., Member NYSE, NASD, and SIPC, which is a subsidiary of Wachovia Corporation. "Wachovia Securities" is the trade name under which Wachovia Corporation conducts its investment banking, institutional securities, and capital markets businesses through its bank, non-bank and broker-dealer subsidiaries. First Union Securities, Inc. is an entity separate and distinct from its affiliated bank and thrifts, and its sister affiliate Wachovia Securities, Inc., Member NYSE, NASD and SIPC and also a separate broker-dealer subsidiary of Wachovia Corporation.

FSSF102201-141149

Financial Services/Specialty Finance

Table Of Contents Introduction........................................................................................................... 4 The State Of The American Consumer ............................................................................ 5
Home Ownership Skyrocketed In The 1990s, As Did Home Values ................................................ 5 State Of The Consumer ............................................................................................................... 6 Real Personal Consumption Expenditure .................................................................................... 7 Unemployment ............................................................................................................................. 8 Consumer Credit Outstanding...................................................................................................... 8 Credit Card Statistics--Average Credit Line, Open to Buy ............................................................9 Consumer Credit Outstanding Year Over Year.............................................................................9 Tax-Rebate Letter .......................................................................................................................10 The American Consumer And The Refinancing Boom ....................................................................10 Refinance Index; Year-Over-Year Change In 30-Year FRM.......................................................11 Refinance Index; Year-Over-Year Change In 1-Year ARM ........................................................11 Bank Net Charge-Offs Versus Refinance Volume ......................................................................12

The Macro Picture................................................................................................13
Growth In Personal Consumption Expenditure ...........................................................................13 Annual Percentage Change In Bankruptcy Filings 1991-2001......................................................................................................13 Revolving Debt In 1990 Versus 2000..........................................................................................14

The Market ...........................................................................................................15
Total Charge Volume ..................................................................................................................15 Total Debt Outstanding ...............................................................................................................16 Projected Domestic Bankcard Volume And Transactions...........................................................16 Share Of Transaction Volume.....................................................................................................17

Consolidation ......................................................................................................18
Monoline Market Share In 1988 Versus 1999.............................................................................18 Top Eight Credit Card Companies 1990-2000 ............................................................................18 Top 30 General Purpose Card Issuers In Terms Of Outstandings .............................................................................................................19 The Usual Suspects--Notable 1999-2001 Domestic Portfolio Acquisitions .............................................................................................. 20

Competitive Pressures Relevant For Industry-Margin Squeeze........................................................................................21
Mail Volume--“Pick Ones To Pick Nones”....................................................................................... 21 Quarterly Mail Volume And Consumer Response Rates ..................................................................................21 Most Active Mailers .....................................................................................................................22 Account Acquisition Costs................................................................................................................22 Bankruptcy And Net Charge-Offs.....................................................................................................22 Visa Bankruptcies .......................................................................................................................23 Net Charge-Offs--Historical And Projected .................................................................................24 Credit Card Charge-Offs .............................................................................................................24 Pretax Profit + Provision As A % Of Receivables .......................................................................25

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Credit Cards 101

How Credit Card Companies Make Money .......................................................26

Credit Card Company Income Statement ...................................................................................26 Net Interest Income..........................................................................................................................26 Finance Charges--Fixed Versus Variable Portfolio Composition .................................................................................................26 Credit Ratings--One Component Of Financial Flexibility.............................................................27 Fee Income ......................................................................................................................................27 Fee Trends--Historical And Projected .........................................................................................28 Provision For Losses........................................................................................................................28 Loan Loss Provision....................................................................................................................29

Risk-Adjusted Margin .........................................................................................30
Risk-Adjusted Margin Calculation ..................................................................................................30 Risk-Adjusted Margin Trends......................................................................................................30 Expenses .........................................................................................................................................31 Earnings Per Share..........................................................................................................................31 The Bottom Line--Profit ....................................................................................................................32 Profitability Per Account ...............................................................................................................32

Appendix A...........................................................................................................33
Managed Receivables.................................................................................................................34 Net Charge-Offs ..........................................................................................................................35 Delinquencies..............................................................................................................................36 Efficiency Ratios..........................................................................................................................37 Marketing Spending Trends ........................................................................................................38 Fee Trends..................................................................................................................................39 Net Interest Margin Trends .........................................................................................................40 Risk-Adjusted Margin ..................................................................................................................41 Loan Loss Provision....................................................................................................................42 Profitability Per Account ..............................................................................................................43

Appendix B--Company Notes…………………..…………………………………..……….…………..45 American Express Company…………………………………………………..……………….………….47 CompuCredit Corporation………………………………………………………………………………….53 Capital One Financial Corporation………………………………………………………………………..57 MBNA Corporation………………………………………………………………………………………….63 Metris Companies Inc………………………………………………………………………………………69 Providian Financial Corporation……………………………………………………………………….…..73 October Master Trust Data……………………………………………………………..…….…..77

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Financial Services/Specialty Finance

Introduction
In many respects, credit card companies have been the true pioneers within the financial services industry. Credit card companies were the first to direct market through the mail, apply risk-basedpricing, and cross-sell ancillary products. Those three applications have become of paramount importance, as financial services have become increasingly competitive over the past decade and now are in part or entirely executed at most financial services companies. It gives us pause that under distinct competitive disadvantages, namely cost of funds and a captive customer base, the monoline credit card companies have grown their market share within the industry to more than 40% during the past ten years from just 4% in 1988. The emergence of direct mail and the evolution of the securitization market are largely responsible for the companies’ ability to level the playing field, but the monoline credit card companies have demonstrated a superior ability to create profit from this increasingly competitive industry. We believe the best demonstration of this is through an analysis of risk-adjusted margin. The successes gained from such innovative strategies attracted many players into the credit card market over the past decade and competition grew intense. In efforts to maintain margin, some players took increased risk through offering credit to “underserved” or “subprime” markets. The theory applied to this endeavor was that advanced modeling enabled certain companies to price appropriately for risk. In reality, those companies could not price adequately for risk unless crosssell fee products were also sold to customers. For a time, such a strategy was successful and certain few credit card companies became momentum stocks, with high fee revenue and powerful revenue growth. Then came the Spring of 1999. In May 1999, a suit was filed against Providian that would change the credit card industry forever. The suit accused Providian of deceptive lending practices (largely related to the fee-based products it sold to customers). Immediately, Providian reversed course to appease regulators. It adopted more customer-friendly practices, and as a result, the company’s fee income dropped dramatically. Throughout the rest of the industry, too, fee-based products slowed considerably. We believe this was the beginning of significant problems for subprime players. We believe that as the consumer recession worsens over the next several quarters, the subprime players will be the most adversely affected. First, the balance sheet of the subprime customer is materially worse than that of the prime customer, most obviously because the bulk of subprime customers are renters who have not participated in the 50% rise in home values created over the past decade as well as the enormous monetary gain created by the Federal Reserve through declining interest rates. Equally important, it appears that without the ability to tack on fee-based products to traditional credit card-lending products, companies are significantly less likely to appropriately cover risk assumed in subprime lending. On the basis of concerns over credit quality, as well as an appreciation for companies with cost-ofcapital advantages, we believe investors will benefit from companies that have little exposure to subprime lending, as well as strong cost-of-funds advantages. We believe MBNA and Citibank will be the long-term beneficiaries. Accordingly, our only Strong Buy ratings in the group are reserved for the stock of those companies.

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consumer. Lower interest rates also played a significant role in housing demand. to name a few) has grown faster than spending in the 1990s. rents and royalties. In fact. Personal consumption expenditure grew at an average annual rate of 5.S. in absolute terms this was an increase of 7. net capital gains as a percent of adjusted gross income almost tripled. we believe the average U. In 1990. adjusted gross income grew at an average annual rate of 6. even though consumers consistently spent more than they made. consumer is better off than many perceive. we do believe that.7% in 1999 from 3. relative to adjusted gross income these increases were almost flat.9% in 1999.3% in 1990.S. the main factor was the influence of capital gains on the U. long-term interest rates were 8. a change of 75%. In recent years. In 1990. GDP growth has slowed. rising to 69 million owned homes in 1999 from 62 million in 1994. taxable interest. the U. and net income from estate or trust. the negative savings rate that prevailed in the United States was believed to be a symptom of an unhealthy consumer balance sheet.S. This made the consumer’s cost of funds cheaper. As calculated by Freddie Mac. the average U. or a 18. It has been consumer spending that accounts for two-thirds of GDP growth. In fact.7 million homes. consumer. Though the U. For the same period. households invested 23% of their assets into mutual funds and equity assets. Though consumers accelerated their spending. As Did Home Values In 1994.Credit Cards 101 The State Of The American Consumer The single-largest question on investors’ minds today is the current and prospective state of the U. The increase in home ownership lent itself to an increase in housing prices because of stronger demand.1% and steadily declined throughout the decade. While only a 3% jump in home-ownership rates.S. growing to 8.4% CAGR.8% for the period 1990-99. to 5.S. however. consumer’s adjusted gross income. (income reported to the internal revenue service in order to calculate tax payments which includes not only salary and wages. consumer. but also capital gains. and with the recent pullback in consumer confidence and consequently. Home Ownership Skyrocketed In The 1990s. making more people able to afford a home and increasing demand. According to the Census Bureau. The bull market of the 1990s allowed the consumer to ramp up spending while maintaining an even balance sheet compared to the beginning of the decade. We do not profess to have any crystal ball with respect to the state of the U. consumer. as evidenced through the data we have detailed. According to the Federal Reserve.8% in 1999 from 3.2%. but this changed after 1994.785. expenditure.S. The past decade was an outstanding environment for the U. U. net capital gains (capital gains less capital losses) grew 358%. other than the current industry trends we outline herein. By the end of the decade home values had increased by 36%. the historic home-ownership rate in the United States was 64%. reaching a peak of 140% of 5 . we argue herein that the consumer has maintained a relatively stable balance sheet over the past decade.9% from 1990 to 1999. A further sign that the housing market was heating up was annual appreciation in housing prices. the average value of a home was $70. consumer does have a negative savings rate.S. By 1999. to $96.000 per average home. Capital gains were able to play such a pivotal role in the health of the consumer because of the widespread participation in equities and equity mutual funds in the 1990s. consumer is no worse off now than at the beginning of the 1990s. Much concern for the future of the economy is centered around the consumer’s ability to continue spending.S.S. Consumer expenditure relative to adjusted gross income actually fell 2. prices accelerated to 5. Although salaries and wages were a component of this growth. For the period 1990-99.3% in 1990. legislation was passed making it easier to obtain a mortgage for home ownership. in 1990 only 9% of total household assets were in mutual funds or equity assets. to $517 billion from $113 billion. In fact. rising to 67% by 1999.

024 13. they can and will.2% 11.1% 62.161 1997 $49.468 47.4 255.102 12.614 356.970 3.5% 1994 140.6% 1995 121.2% 57.5% 23.4% 65.033 26.974 1.4% 356.9% 7.0% 24.880 424.547 96.127 1.208 45.332 1994 $13.5% 6.1 260.6 265.3% 7.139 1993 $13.3 64.865 71.7% 55.043 6.3 249.405 2.6 3.7% 1993 $3.0 5.010 1.186 10.8% 54.089 27.7% 59.1% Source: Internal Revenue Service.1 2.460 15. and Census Bureau Undoubtedly.0% 4.0% 25.975 62.4 3.5% 4.077 42.3% 68.0% 25.424 1992 $35. State Of The Consumer # Of Households (MM) # U.578 7.272 1996 $17.715 795 5.100 4.059 10.1% 35.332 5.6% 1998 $5. is not overburdened with debt and is well prepared for a period of economic weakness.8% (1.2% 44.6% 1994 $3.4% 4.2% 61.7% 1996 99.7% 6.7% 1993 136.216 1.566 101.330 21.416 3.3% 50.651 10.199 35.7%) State Of The Consumer (In $billions) Adjusted Gross Income Salaries And Wages Net Capital Gains As % Of AGI Personal Consumer Expenditure Home Values Consumer Credit Outstanding Interest Rates Short Term (One-Year Treasury) Long Term (30-Year Treasury) 1990 $3. Preliminary data already is showing the cash register is ringing again after a complete drop-off in the weeks immediately following the attacks of September 11.2% 5. Population (MM) Homeownership Rates # Of Owned Homes Appreciation In Housing Prices (Annual) Equity In Home 1990 93.895 23.4% 6.730 CAGR % Change 4.345 6.2% 71.253 456 17.8% 4.6% 5.182 4.366 2.Financial Services/Specialty Finance adjusted gross income in 1994.852 4.321 32.4% 60.8% 1995 99.123 5.4% CAGR % Change (0.1% 4.7% 58.7 2.6% 3.968 3.527 53.473 73.8% 64.3% 0.3 252.590 26.8% 5.1% 5. 6 .306 1993 $34.484 27.8% 3.824 37.2 65.9% 6.6 4.8% 6.8 65.1% 5.599 113.306 1.2% 4.397 30.285 4.104 859 3.6% 6.078 8.189 3.2% 55.514 1998 $52.976 10.785 89.155 35.7% 1991 94.7% 11.948 801 3.138 58.826 36.5 64.568 1997 $18.0% 310.732 949 20. The American consumer. the consumer did not spend more relative to income in the latter part of the decade.4% 1995 $4. Benefiting from lower borrowing costs.6% 1999 111.2% 23.231 32.9% 59.3% 61.039 27.4% 1997 101.775 3.1% 60.5 270.496 80.669 139.9% 1996 $4.4% 1998 111.S.5%) State Of Consumer Per Household Adjusted Gross Income Salaries And Wages Cap Gains Per Household Personal Consumer Expenditure Home Values Consumer Credit Outstanding 1990 $36.6% 1999 $5.558 3.951 12.928 1999 $21.5% 52.504 1.9% 4.536 3.3% 28.079 94.785 8.9% 54.8 64. Freddie Mac.132 1995 $42.481 27.8%) 0. and 401(k) value increasing.341 1.4% 74. which fueled consumer confidence and spending.665 9.9% 1999 103.1% 1991 $3.230 CAGR % Change 5.7% 5.566 27. If consumers are willing to spend.889 6.721 1998 $20.262 10.625 1991 $35.2% 4.366 8.525 56.5% CAGR % Change 1.098 8. peaking at 29% of adjusted gross income in 1994 and falling to 24% by 1999.6% 23.1% 1994 97.302 34.3% 17.081 72.8%) (3.673 8.4% 5.027 9.4%) (11.530 33. IRA.1% for the period 1990-99.0% 77. on average.420 454 15. the “wealth effect” also played a major part.080 12.227 1991 $13.3% 1.913 27.6% 1991 121.446 2.615 116.663 70.3 7.9% 8.833 7.908 1994 $35. than in the beginning.377 251.254 27.9 272.497 9.382 2.7% 26.895 2.9% CAGR % Change 6.487 3.578 5. An illustration of the consumer’s financial position during the past decade follows. as we have shown in the preceding table.1% 5.989 1999 $56. in our view.779 1995 $15.5% 1.343 1996 $45.496 1.213 1.8 64.6% 18.2 66. in the midst of the bull market.236 10.174 516.570 22.5 4. this ratio had fallen to 111%.119 1.8% 1996 118.560 13.3% 24.4% 4.8% in 1999 from 3.9% 17.3% in 1990. Consumers saw their portfolio.144 549 17.9% 55.8% 38.4 3.5% 165.608 805 7.2% State Of Consumer Per Capita Adjusted Gross Income Salaries And Wages Cap Gains Per Capita Personal Consumer Expenditure Home Values Consumer Credit Outstanding 1990 $13.479 4.5%) 67.201 170.4 257. Consumers were able to do this by borrowing.426 6.630 3.2 64.7 3.9% 8.3% 3.722 51.859 85.0% 61.2 3.7% 66.4 4.3% 26.917 11.041 14.5% 1998 102. consumer debt relative to adjusted gross income grew 3.841 4.1% As % Of Adjusted Gross Income Consumer Expenditure Consumer Credit 1990 114.1% 1992 $3.883 12.1% (22.281 984 5.8 2.7 66.847 1.2% 57.336 40.0 64.0% 9.1% 51.4 1. Federal Reserve.8% 6.264 5.212 41.772 74.1 4.6% 1992 96.212 5.0 267.2% 6.0% 55. with net capital gains as a percent of adjusted gross income rising to 8.4 5.7% 1997 $4.0% 59.6%) (27.4% 46.253 536 18.941 12.325 2.0% 62.3% 3.8% 5. By 1999. However.6% 54.563 1.7% 16.8 5.4% 4.2% 317.1 3.5% 1993 96.437 49.491 4.182 648 19.243 3.1 7.356 1.151 1992 $13.199 8.6% (2.8 8.3%) (2.486 1.9% 1992 128.7% 1997 114.0 262.8% 69.758 27.178 403 16.615 141.

the consumer’s picture may not be as bleak as it was in 1991-92.5% in Q2 and Q3 of 2002. following three straight negative quarters in 1991. MBNA and Capital One each reported that spending was resilient. up from its 20-year low of 3. it has yet to contract. and expected to climb to 5. 7 . with Q3 2001 being the slowest. Unemployment is currently at 4. unemployment reached an 11year peak of 7. even in the wake of the attacks of September 11. a slowdown in consumer expenditure could translate into a slowdown for the credit card industry and a bifurcation between industry leaders and laggards. Because consumer expenditure fuels the growth in credit card receivables and total volume. There is evidence of this in Q3. Many have expressed concern that rising unemployment will stifle consumer spending. personal consumption expenditure recovered and grew by 2. when employment peaked and real personal consumption expenditure decreased for three straight quarters. at 2. unemployment would have to worsen by 37% to return to its 1992 peak. However. In June 1992.Credit Cards 101 Real Personal Consumption Expenditure 6% 5% 4% Q3 3% 2% 1% 0% -1% Source: Federal Reserve The preceding chart highlights annual changes in real personal consumption expenditure.9%. While Providian was stating that it had seen consumer spending weaken as early as August.8%. unemployment is expected to worsen slightly. Consequently.2%. and although personal consumption expenditure has slowed. According to our Wachovia Economics Group.5%.9% in September 2000. for the past six quarters there has been decreasing growth.4% annual growth in consumer expenditure. After the peak in Q1 2000 at 5. During Q2 1992.

8% Wachovia Estimate Peak:Q2 2002 & Q3 2002 5.5% 4.60 trillion. As shown in the following chart. up 8. the Federal Reserve’s monthly consumer credit report showed total outstanding consumer credit to be $1.5% 3. This leaves little room for the American consumer to take on more. Consumer Credit Outstanding 1.60 trillion Revolving Debt: $702 million Revolving Source: Federal Reserve Total Consumer Credit Approximately 90% of this revolving debt is credit card debt.400 1. In addition.9% Source: Federal Reserve and Wachovia Securities estimates In October. Put simply. 8 .600 1. 7.5% Sept 2000 3. The larger question is.000 800 600 400 200 0 *September: Total Debt: $1.0% from $650 billion in 2000.5% June 1992 7.5% 7.49 trillion. up from 15% 20 years ago. at $1.5% 6.Financial Services/Specialty Finance Unemployment 8. or does it? We show in the following table that the average customer of one of the top ten credit card companies has roughly 80% available credit. a consumer could increase his or her spending power by a factor of 5x before bumping against his or her credit limit.5% 5. the amount revolved of total consumer credit is approaching one-half of outstanding credit. does the consumer have the inclination to spend more? Without the consumer’s inclination to do this. consumers are revolving $702 billion of that.200 1.800 1. credit card companies may find it difficult to continue growing receivables at the pace of the past ten years.0% higher than in 2000.

336. Open To Buy And Utilization Rate Average Credit Line MBNA NextCard Metris Capital One CompuCredit Providian* American Express Discover Top 10 Largest Credit Card Companies *Owned Loans only Average Open To Buy $7. The average hides this separation in the segments and shows a high average open to buy because the superprime and prime markets account for about 80% of loans.4% 77.0% 34.000 $4.0% NA NA 21. and utilization rates at the major credit card companies. or $1. Because of these factors.362 Source: Company data Consumer Credit Outstanding (Yr/Yr) 35% 30% 25% 20% 15% 10% 5% 0% (5%) September Total Consumer Credit Source: Federal Reserve Revolving 9 . average open to buy.850 $1.500 $3. The subprime customer needs that credit line.273 NA NA NA $4. the average superprime and prime customer possesses a healthier balance sheet than the average subprime customer’s.000 NA NA NA $6. This translates to an industry utilization rate of about 21%. and subprime market. The superprime and prime markets tend to use less of their available credit line. This could be due to a combination of factors. The average credit line in the industry is $6.239 $1.450 $2. including the fact that this segment usually has several credit cards.5% $11. and the average open to buy (or credit available) is $4.996 Utilization Rate 31. Credit Card Statistics: Average Credit Line.2% 50. and therefore. prime.Credit Cards 101 The following table compares the average credit lines. the average open to buy in the superprime and prime markets is most likely much higher than the subprime.362.500 $2.635 $1.8% 35. as it is usually its sole means of obtaining a loan.6% 36.996. Second.000 $5. industry statistics could be misleading because they hide the bifurcation existing across the superprime. These companies account for 80% of all receivables and are a good proxy for the industry. have a high open to buy. The subprime generally has a higher utilization rate and lower available credit along with a smaller line of credit. However.

Tax Rebate Letter “Dear Taxpayer: We are pleased to inform you that the United States Congress passed and President George W. The new tax law provides immediate tax relief in 2001 and long-term tax relief for the years to come. as illustrated in the preceding chart. To insure that consumers will be willing to spend more. This has most directly affected mortgage rates.000. Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001. if existing credit card consumers still have the ability to increase their borrowing.00 during the week of 9/24/2001. through which Americans have taken the opportunity to refinance and get out of debt. which provides long-term tax relief for all Americans who pay income taxes. revolving debt has grown faster in the past. then Americans can handle more debt and revolving debt will continue to outpace total consumer credit. with the average cash-out being at $18. you will be receiving a check in the amount of $300. as follows .Financial Services/Specialty Finance Though total and revolving debt growth move together. 10 . The Federal Reserve estimates that $55 billion in home equity was cashed out during the refinancing boom. according to a study conducted by the Federal Reserve. The significance of the proportion of cash-out refinancings is that this extra cash is used by consumers to pay down their credit card debt and go out and purchase more goods and services. During the last refinancing boom. The study found that 45% of cash-outs were used to repay other debts.IRS Notice of Status and Amount of Immediate Tax Relief Source: Internal Revenue Service The American Consumer And The Refinancing Boom This year. As part of the immediate tax relief. the Federal Reserve has also joined in the effort to maintain consumer spending by cutting interest rates ten times since January for a total of 450-bps. the government is relying on consumers to spend their tax rebates and keep the economy afloat. Of course. in 1998-99.” . 35% of all refinancings were cash-outs. We provide a copy of the letter every American received to inform them of the tax cut.

As the 30-year FRM has fallen 139 bps.Credit Cards 101 Refi Index Yr/Yr Change 1100% 900% 700% 500% 300% 100% (100%) 8. we plotted the refinance index against the 30-year fixed-rate mortgage rate (FRM). Americans are taking advantage of favorable interest rates in both the long term fixed rate and short term adjustable rate and rushing out to refinance their homes.5% 7.2% 8.37% from 7. the one-year ARM fell 235 bps. In the following chart.5% 5. to 5.0% 5.0% 6. we plotted the refinancing index against the one-year adjustable-rate mortgage (ARM).7% 6.5% 6.5% 7.535 from 651. Refi Index Yr/Yr Change 1100% 900% 700% 500% 300% 100% (100%) 8.11% in 2001 from 7.79% in November 2000.2% Refinance Index Source: Mortgage Banker's Association of America 30-Year FRM The ten interest rate cuts by the Federal Reserve have definitely been reflected in the mortgage market. During the past year. a 702% increase year over year.7% 7.0% Refinance Index Source: Mortgage Banker's Association of America 1-Year ARM 11 . the weekly refinancing index spiked up in January after the first 50-bp rate cut.46% in 2000. to 6. This allows them to pay down current debts and free up cash for future spending. and has averaged 493% over 2000 levels year to date.0% 7. the refinancing index has risen to 5.0% 7.2% 7.0% 6.5% 6. According to the Mortgage Banker’s Association of America. In the preceding chart.

0% $200 $0 1986 1987 1988 1989 1990 1991 1992 Source: Federal Reserve.000 6.5 months left. In order to define the relationship between debt repayment and refinancing. Of this. and the third in the past ten years. only 25% of total refinancings were cash-outs.0% $800 5. putting an end to the refinance boom and an end to the refinance money being freed up from mortgages. Mortgage Bankers Association 1993 1994 1995 1996 1997 1998 1999 2000 2001E 2. Bank Net Charge-Offs Versus Refinance Volume Surge in refinancing followed by improving credit quality $ Bill $1. We estimate that net charge-offs will reach 6% this year and expect a decrease in 2002 as a result of improving credit quality from the refinancing boom. This leads to an improvement in credit quality and lower charge-offs in the period following the refinancing boom. but the effects the attacks of September 11 has had on the economy may prolong a downturn.1 trillion in 2001. the average refinancing boom has lasted 66 weeks. when homeowners refinance their mortgages.5 months. this boom has 5. According to the Federal Reserve. or 16. as illustrated in the following chart. In the past two refinancing booms. credit card debt generally gets paid off.Financial Services/Specialty Finance However. possibly as a result of refinancing freeing up cash to pay off other debts. for a total of 450 bps.0% $1.0% Refinance Volume Bank Net Charge-offs Source: Federal Reserve.0% $400 3. the second in the past three years. the Federal Reserve will begin to raise rates. how much longer can this refinancing boom last? After all. Homeowners used the refinancings to tap the higher equity in their homes. the Federal Reserve cannot cut rates indefinitely. This is attributed to the steep rise in home prices in the years proceeding the 1998-99 boom. Over the past 11 years. According to the Mortgage Banker’s Association estimates. In 1994.0% $600 4. Mortgage Bankers Association of America and Wachovia Securities estimates 12 . Whether the economy rebounds in 2002 or in 2003. However. As mentioned. The precipitous drop in both the 1-year ARM and the 30-year FRM has generated a financing boom. The Federal Reserve has already cut interest rates ten times. up 452% from 195 billion in 2000. If the economy shows signs of recovery. Based on averages. bank net charge-offs decreased. past refinancing booms have been dictated largely by interest rate cuts and increases. the first in 1992-93 and the second in 1998.200 All Bank Net Charge-offs 7. the Federal Reserve may keep interest rates constant. This refinancing boom began in January 2001 and is roughly 11 months old. refinancings are estimated to reach $1. cash-out refinancing accounted for 35% of total refinancings and the Federal reserve estimates the total dollar amount at $55 billion. Each of the past three booms began with a cut in rates and ended with the first sign of interest rate increases. during the 1998-99 boom. and the Street is expecting more. 45% of cash-out refinancing loans and 28% of cash-out loans in dollars were used to repay other debts. we looked at data from previous refinancing booms.

0% 10.Credit Cards 101 The Macro Picture Growth In Personal Consumption Expenditure 10.0% 8. The chart shows personal consumption expenditure on a monthly basis. Annual Percentage Change In Bankruptcy Filings 1991-2001 35. personal consumption expenditure grew 3.0% 6. Although the U. personal consumption expenditure grew by only 1.0% (2.S.S. economy has slowed.1%.0% 4.0%) Source: Bureau of Economic Analysis Credit card companies’ earnings are highly correlated to economic variables such as personal consumption expenditure and bankruptcies. but at a slower pace.0% 5.2% in September.0% 2.0% 15.0% 30. and discussions with card issuers tell us that spending is approaching pre-September levels.0% (5. in August. However.0%) Source: Administrative Office of the U. As shown in the preceding chart.0% 25. and unemployment and layoffs are rising. In September. the late 1990s and 2000 saw a steady upward growth in consumer spending. its slowest rate since December 1991.0% 0. consumer expenditure continues to grow. there have been only four periods of sequential negative consumer expenditure growth since 1960.0%) (15.0% 20.0% 0. This was largely due to the attack of September 11.0%) (10. Courts 13 . As evidenced by the chart.

the American consumer will continue to spend.0x and revolving credit grew 2. total consumer credit grew 2. Americans are not afraid of borrowing and. bankruptcies. consumer credit outstanding was at $1. total filings numbered 366. the highest since June 1998 and 17. up 24.5% from 321. In Q2 2001. bankruptcies have returned.394. to $872 billion from $554 billion. are not afraid to take on more debt. increasing the amount of existing debt and the loan portfolios of the card issuers. This is something watched closely because of its impact on earnings. Furthermore.5x. Courts reports the number is rising. or 44% of total consumer credit outstanding. Only $250 billion of this. or 31%. At year-end 1990.841. If early indications are correct. Revolving Debt In 1990 Revolving Debt In 2000 69% 56% 44% 31% Non Revolving debt Source: Federal Reserve Revolving debt 14 . In 2000. the General Administrative Office of the U. In Q1 2001. During the ten-year period. A benefit for the credit card issuers is that Americans. After a two-year period of decreasing annual growth. as we have illustrated. this is the second consecutive quarter of year-over-year increases for filings.Financial Services/Specialty Finance Turning to a second major variable affecting earnings.729 compared to the same period in 2000 and the highest since the GAO’s September quarter in 1990.6 trillion and revolving debt had climbed to $700 billion. consumer credit outstanding was $800 billion. was revolving. while nonrevolving debt has grown only 1.S. an increase of this magnitude is obviously significant. have done so in proportion to increases in income. Clearly. Revolving credit card debt has almost tripled in the past ten years and has taken a 13% share from nonrevolving debt.8x. Because bankruptcies account for between 30% and 50% of charge-offs at credit card companies. total filings were 400.5% higher than in Q1 2000. as the past has shown.

5 trillion from $466 billion.1% on average annually. and that debt outstanding will reach $1 trillion.4%. a paradigm shift occurred with the emergence of the monoline credit card company. implying an 8% compound annual growth rate. Also.0% 2500 2000 1500 1000 500 0 Source: The Nilson Report Total Debt Outstanding 1980-2010E 1200 1000 CAGR: 9. debt outstanding grew to $675 billion from $242 billion. More merchants began to accept credit cards. In the next ten years. By segmenting the market and lowering rates to compete for new customers. a 222% total increase and a compound annual growth rate of 12. growing to $1. In the early 1990s. Fueling this projected growth are rising personal income. credit card companies benefited from total charge volume. credit card companies were able to reach untapped markets and add more cards to wallets. Total Charge Volume 1980-2010E 3500 3000 CAGR: 10. The Nilson Report estimates that volume will reach $3. the industry was in its infancy. Between 1990 and 2000. according to the Nilson Report.3% 800 600 400 200 0 Source: The Nilson Report 15 . For the same period. and credit cards stealing market share from other methods of payment. growing 179% and at a compound annual rate of 10. a 4% compound annual growth rate. with total volume growing at 1.8%.1 trillion. in the past. increasing consumption expenditure.Credit Cards 101 The Market The credit card market has seen significant growth over the past ten years. The catalyst for the turnaround was that the nature of the industry changed. credit cards traditionally had been issued by banks and retail stores. During the 1980s. charge volume and debt outstanding are expected to increase at a decreasing rate.

S.3 billion transactions in 2010. That is roughly 2. in our view. MasterCard. This would be an increase to 49% of all transactions from 28%.000 6.000 14.000 $500 $1999 2005E Bank Card Volume Source: The Nilson Report 2010E Growth 2.6x and 1. In 1990. Bank cards (Visa and MasterCard issuers) alone are expected to complete $2. Share Of Transaction Volume 100% 85% 75% 47% 50% 39% 25% 15% 0% 1990 1995 Paper Source: The Nilson Report 1998 Cards 2005 2010 16 . This has been helped by increased wider acceptance of Visa.500 $1. according to the Nilson Report.2 billion in volume and 15. and Discover by merchants. and credit cards increased to 28% from 15% in 1990.500 Still room for growth Mill Projected Domestic Bankcard Transactions 18.7x current levels. cash was used in 85% of domestic transactions. according to the Nilson report.Financial Services/Specialty Finance Offsetting the declining pace of growth in total credit card debt is a projected doubling of credit card usage over the next year. In 1999. As credit cards take market share from paper (cash and checks).000 24% $1.000 48% 10. paper’s share of total transaction volume fell to 69%. Projected Domestic Bankcard Volume $Bill $2. Credit cards are expected to surpass cash as the preferred medium of exchange within the next ten years. We believe people are now more comfortable and prefer to pay for their goods and services with credit.000 1999 2005E Bank Card Transactions Source: The Nilson Report 2010E Growth This expected growth is due to the credit card rapidly gaining acceptance from the U. amounts in absolute dollars and number of transactions will increase. a change of 75% from current levels. consumer.000 43% Still room for growth 77% $2. AMEX.

MasterCard is going one step further. Plastic is becoming a trusted payment option among Americans as credit card companies develop smart chip technology. and retailers stress security and privacy. All offer zero liability for unauthorized transactions over the Internet. American Express has issued Blue as an Internet smart card. Discover has developed a single-use card number. MasterCard and Visa have done the same with their own smart cards. 17 .Credit Cards 101 Contributing to this change is the use of the credit card to pay for goods over the Internet. one-time-use credit card numbers. Mastercard is promoting a smart card phone that can be used at any merchant that accepts MasterCard. with mobile commerce.

4 2000 Rec.9 32. Top Eight Credit Card Companies 1999-2000 Monoline Market Share Continues To Increase in Bankcards Receivables in $Billions 1990 Rank 1 2 3 4 5 6 7 8 Company CitiBank Chase MBNA First Chicago Bank of America Bank of New York Manufacturers Hanover Wells Fargo 1994 Rec. while the banks divested their card divisions and sold off portfolios.0 20.5 5. more important.5 8.1 14.3 14.0 14.3 15.2 70. the monolines increased market share by 40 percentage points.0 10.8 3. CompuCredit From 1988 to 2000. As shown in the proceeding chart.2 26. the monoline credit card companies grew to a 44% market share from just 4%. As the industry will continue to see margin compression.8 1998 Rec.2 21. the banks.9 17.3 Company CitiBank Discover MBNA First Chicago First USA Household Chase Chemical Company First USA CitiGroup MBNA Chase Bank of America Household Capital One Fleet Financial Company CitiGroup MBNA First USA Chase Providian Capital One Household Fleet Financial Rec. due to an increasingly saturated market and higher funding costs. the monolines found it easy to steal market share from the incumbent card issuers.0 36.Financial Services/Specialty Finance Consolidation Monoline Market Share In 1988 Versus 2000 1988 2000 56% 96% 44% 4% Monoline Non Monoline Monoline Non Monoline Source: Faulkner & Gray.6 12. Through their marketing expertise and sole focus on the credit card market.2 11.8 10. 69.7 26.9 69.8 Monline market share 10% 22% 47% 54% Source: The Nilson Report Now that the monolines have clear advantages of scale and the industry is increasingly competitive. Without underestimating the need for both the ability to access the securitization market and the direct mail channels. in the late 1980s there was little direct mail solicitation and.6 2.3 12. the large players have $10 billion in receivables or more. 18 . $ 96. through organic growth and acquisition.5 6.9 6.9 3. we have every reason to believe the industry will continue to consolidate. efficiencies of scale will be critical to maintaining profitability.5 14. $ 31. it was only the beginning of the ever-important securitization.4 67. Understandably.6 48. $ 39.

6 11. Currently.6% 2. We believe the smaller companies in the top 30 (15 and below) will need to grow substantially or are likely to be bought up by one of the bigger companies lurking within the top ten.5% 1.3% 1.6% 1.1% 2 MBNA America Source: The Nilson Report 125. namely those of Associates and Wachovia.5% 5.7% in 1990.6% 12.8 1. and First USA have been some of the most active acquirers in the past two years.8 2.4% 0.82 Ten years ago.5 5.9% 6.9 3. but also larger companies’ portfolios. Realizing that size and scale are the only way to be successful in the credit card game.6 2.7 2.2 2.1% 1. Savings Signet Bank Colonial Bank Seafirst Bank Norwest Bank Marine Midland First Atlanta C&S/Sovran First Nat'l of Omaha PNC Financial Includes Associates acquisition Includes Wachovia acquisition Company Citigroup First USA AMEX Discover Chase Providian Capital One Bank of America Household Fleet Boston Metris Wells Fargo US Bancorp USAA Federal Savings First Nat'l of Nebraska People's Bank Cross County First North American Nat'l National City Firstar Sears National Advanta Nextcard CompuCredit HSBC Bank First Consumers National Navy Federal Credit Union Wells Fargo Financial Town North Nat'l * Formerly Chemical and Manufacturer's Hanover ** Formerly Signet Bank 1 2001/1990 1/1 2/18 3/5 4/3 5/2 6/4* 7/NR 8/22** 9/7 10/12 11/72 12/NR 13/10 14/51 15/21 16/29 17/47 18/NR 19/NR 20/NR 21/NR 22/NR 23/NR 24/NR 25/NR 26/26 27/NR 28/64 29/9 30/NR 31. Share Company Citibank Discover AMEX Chase Manhattan MBNA Corp First Chicago Bank of America Bank of New York Manufacturer's Hanover Wells Fargo Associates National Household Bank NCNB America Bank One.7% 1.5% 10.9% 1.0 2.2 2. Nos.5 57.3 1.7% 97. the top 30 credit card issuers were more evenly distributed in terms of market share. compared to 10.8 17.7 1.9% 0.2 37.3 1.1% 1.6% 1. 21-30 control 2.4 30.9 0.4 5.7% 1.5 70. More to the point.9% 2.9 6.4% 1.3 50.8% 1.6% 1.1 9.1% 1.4 2.3% 4.5 29.5% 2.9 70.7% 5.3% 0.1 1.2% 2.2% 0.7% 3.2% 4. MBNA.9 1. Columbus Chemical Bank Corestates Bank First Deposit Bank Security Pacific First USA AT & T Universal USAA Fed.4 9.1 2.1% 1.4% 0.7% 0.2% 0.5 10.6 2. These statistics show how the competitive landscape has changed in the credit card industry and how a company needs size and strength to be a long-term player.8 1.1 2.8% 5.4 1.5 6.6 2.5 11.3 1.2 1.4% 0.5% 0.8 3.1% 1.9 1.3% 0.2% 8.5 1.0% 0. the top ten companies control 82% of the market share.4% 5.5 14.6 1.0% 9.9 1.Credit Cards 101 Top 30 General Purpose Credit Card Issuers In Terms Of Outstandings ($Bil) January 2001 Top 30 Top 30 Mkt.3% 0. Citigroup.3 2.1% today.9% 0.1 2.7 1.0 1.6% 0. the three have been very aggressive in buying not only industry laggards.0 3. Share January 1990 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1 2 Ranking Mkt.4% 12.2 1.3% 0.4% 1.3% 1.9 14.3 1.6% 1.3% 0.1% 1.2 8. 19 .0% 2.4% 0.2 0.9 25. compared to 74% ten years ago.8 0.9% 6.4% 0.2% 8.7 1.8 25.2% 1.

0 0. handle 90% of transactions.200 535 340 300 286 272 181 150 130 120 112 103 25 15 10 5 Accounts (MM) 25+ 2. While the sector growth may slow as a result of macroeconomic factors in the economy.1 0. According to the Nilson Report.4 0. which should position a few players.500 4.3 24.2 0.8 3.2 NA NA NA <0.1 Buyer Date Associates Wachovia First Union JCPenney PNC Bank Partners First Mellon Bank Corp.2 2.6 0. SunTrust BankCard KeyCorp GE Capital The Huntington National Bank GE Capital Renaissance Holdings Inc. Carolina First Bank First Virginia Banks Inc. and 92% of outstandings. BP America Citgo Petroleum Corp.4 0. the top 25 companies have issued 88% of credit cards. to dominate the industry at the expense of companies that do not have economies of scale or efficient marketing engines. have 88% of charge volume.900 1.500 1. namely MBNA and Citigroup.1 NA 1.000 5. 20 .Financial Services/Specialty Finance The Usual Suspects:Notable 1999-2001 Domestic Portfolio Acquisitions Seller Receivables (MM) 16.000 8.8 1.0 3. These elite few should enjoy growth rates in excess of the industry and the economy. BetBank CitiGroup First USA MBNA GE Capital MBNA Wachovia CitiGroup MBNA Associates Metris Chase First USA Household MBNA Associates Providian MBNA Associates Associates First USA MBNA MBNA Inifinicorp The Credit Store The Credit Store September 2000 April 2001 August 2000 Ocotober 2000 March 2000 December 2000 March 2000 October 2000 December 2000 May 2000 October 2000 August 2000 December 2000 November 2000 January 1999 February 1999 June 1999 July 1999 August 1999 May 1999 April 1999 March 1999 June 1999 August 1999 July 1999 Source: Credit Card Industry Directoryn and company data The industry is already highly concentrated among a few leaders. we believe companies with the lowest cost of capital and best management will be the growth leaders in the industry. Sanwa Bank California WesBanco Bank Wheeling Federal Deposit Insurance Co. Further consolidation is likely to occur in the next few years.9 0. First Tennessee Shell Oil H&R Block CCB Financial Corp.300 1.6 0. Smaller companies likely will find it hard to compete and may throw in the towel.000 2.2 10.990 1.5 0.3 1.900 1.3 0.

The United States domestic market has been segmented and directly marketed to the point of near saturation.6%.0% Response Rates 21 . The emergence of the monoline credit card companies changed this.5 billion pieces of mail were sent to households.100 900 700 500 300 100 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Volume Source: Mail Monitor Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Height Of Teaser War First USA Out Of Market 3. In 2000. 32% more than the 888 million for the same period in 2000.300 1. The market has become increasingly saturated.5% 3. 1. Mail Volume--“Pick Ones To Pick Nones” Increased competition among the credit card issuers for wallets has led to an intense increase in market expenditure. a record 3. which had every advantage of marketing to their captive customer base. as mail volume increased by thousands of pieces each quarter.2 billion pieces were mailed.6% currently. • A rise in account acquisition costs.0% 0.0% 1. The card companies became so effective at acquiring new customers that they actually exhausted the supply of consumers in virtually all market segments. according to BAI Global’s Mail Monitor. and • A rise in bankruptcies. At first this strategy was overwhelmingly well received by the general public. Ten years ago.Credit Cards 101 Competitive Pressures Relevant For Industry--Margin Squeeze The credit card companies are facing a tough operating environment due to several factors currently at work: • An increase in mail volume. the credit card market was dominated solely by the banks.5% 0. In 1990.2%. this past year also set a record low for response rates--0. Growth in mail volume is expected to continue as companies solicit for smart cards.0% 2. as the credit card industry repeatedly solicits the same households.5% 1. response rates have steadily declined. These companies specialized in segmenting the market and sending out direct mail that was tailored for the intended recipient. response rates were above 3. Unfortunately. In Q3 2001. Quarterly Mail Volume And Consumer Response Rates 1. Since the early 1990s.5% 2.500 1. compared to just 0.

we estimate a 15-20% increase in marketing to net new accounts and see an overall rising trend in marketing expense.10 cards on average in 2000. promotions. cardholders had 3. The higher marketing expense is an additional drag on earnings and is squeezing profit margin. versus 1. annual bankruptcy filings were down 4%. advertising. The credit card industry as a whole is spending more on marketing. we expect mailings to decline from the company. As margin comes down. This makes organic growth much harder for bank card issuers Citigroup. bankruptcy filings year to date are currently about 20% higher than in 2000. 2001 has progressed much differently. Of just bank cards (Visa and MasterCard). The top ten direct mailers are listed in the following chart. credit card companies will have to make up the difference with receivable growth within their existing accounts. up from 8. 22 . According to company reports. However. This includes direct mailing.8 ten years ago.5 on average. First USA (Bank One). The problem faced by the industry is the saturation level. Companies have already reported seeing fewer mailings from Providian and less competition for accounts in the abandoned market segments. due to Providian’s recent difficulties. and the monolines. Most Active Mailers Q3 2001 Mail Volume Of Top Ten Direct Mailers 300 250 200 150 100 50 0 Source: Mail Monitor Account Acquisition Costs The credit card companies have reported increased spending on marketing in order to obtain new accounts and keep pace with the competition. We believe most cardholders already have all the credit cards they need. According to Visa USA. According to the Nilson Report. up from 65% ten years ago.31 in 1990. Bankruptcy And Net Charge-Offs In 2000. and special offers. For 2001. Cardholders had 9. the more competitive environment has compelled the companies to increase marketing expense in order to obtain new accounts and keep existing cardholders. approximately 76% of adult Americans carry at least one card. As Providian exits the subprime and superprime markets to concentrate on its “standard” product.Financial Services/Specialty Finance We expect to see competition lessen slightly in Q4. Providian mailed 97 million pieces in Q3 and accounted for 9% of total mailings.

23 .000 per week.594 filings 21.300 in 2000. or 1. which would make it more difficult for consumers to completely escape their debts. as a result. Using this as a basis. However. The effects of the bill’s passing have been removed from Visa’s bankruptcy model for 2001 and 2002. on average.490.000 filings per week. placing our estimate at 25.0%.594 filings. and higher than Visa’s new forecasts. We believe Visa bankruptcy data is an excellent leading indicator for the master trust data released by the credit card issuers each month. The subprime customer simply does not have as strong a balance sheet as a prime or superprime customer and. This works out to an average of approximately 33.1% yr/yr change 1999 2000 1999 Source: Visa U. the attacks of September 11 may serve to further weaken the U.000 filings per week in 2001 and 23. It is possible that much of this year’s bankruptcies were front-end loaded.805. However. or 1. as well. economic environment. we expect bankruptcies during H2 to average between 30. An “unbanked” cardholder has less to protect and will.000 and 31.1%. avoid the collectors.S. This was illustrated by Metris and Providian showing a rise in losses in the past several months. is perceived as going against recent attempts to stimulate the economy and would actually hurt the consumer. However. down from 23%. versus an expected 28. As a result. according to Visa.913 the week prior.7% higher than in 2001 or to have 1. due to the passing of the bankruptcy reform legislation.A. up from 27. the economy has hit this segment hard. This is expected because prime customers are more likely to declare bankruptcy to protect their assets. 2000 2001 We believe bankruptcies will be higher than credit card companies expect. Bankruptcies continue to trend higher. bankruptcy data showed filings of 30. October master trust data showed evidence that losses are rising at the prime issuers.467.S. Congressmen are reluctant to back the bill. in our view. VISA Bankruptcies 40000 35000 30000 25000 20000 15000 10000 2001 Visa Forecast 2001: 1.767. peaking in March and April because of the hysteria surrounding the Bankruptcy Abuse and Consumer Protection Act of 2001 during that period. Visa was expecting bankruptcies to rise 23% in 2001.467.121 total filings.Credit Cards 101 Initially.727. Because bankruptcies account for between 40-50% of net charge-offs. the economic slowdown has taken its toll on the “unbanked” cardholder. Many in Washington feel that the bill. For the week of November 12-16. Visa has revised its 2001 estimate to 21. and up 26% year over year. efforts to pass bankruptcy legislation have stalled due to the September 11 attacks. the rise in bankruptcies in 2001 will have a negative impact on net charge-offs and will hurt earnings. Visa expects bankruptcy filings in 2002 to be 17. and its passing has been effectively postponed indefinitely. The post September 11 economic environment is extremely uncertain and recent bankruptcy data suggest that it is just simply too soon to show any conclusive evidence that we have seen the bottom.

Financial Services/Specialty Finance

Most credit card companies, with the exception of American Express, charge off an account 30-60 days within notification of bankruptcy. Many of our companies cited the March-April period as the peak period that led to higher-than-expected charge-offs in Q2 and saw charge-off rates begin to slow from June into July. However, the attacks of September 11 have changed that. Credit card issuers have stated in their Q3 2001 conference calls that they are expecting continued weakness in the economy to result in higher charge-offs in coming quarters. We are projecting a 20% average increase in net charge-offs for 2001, and expect accelerating increases in Q3 and to carry into 2002, as the economy continues to soften.

(As A Percent Of Average Managed Receivables)

Net Charge-Offs
1997 6.00% 6.34% 53.4% NA 1998 6.40% 6.7% 5.12% (19.2%) 5.67%

Full Year
Company Ticker AXP COF C 1999 5.00% (21.9%) 3.85% (24.9%) 4.91% (13.4%) 4.64% 34.5% 5.42% (21.4%) 4.10% (5.0%) 9.87% (2.5%) 6.94% (8.2%) 2000 4.26% (14.8%) 3.90% 1.3% 4.28% (12.9%) 10.00% 115.8% 4.40% (18.8%) 3.97% (3.0%) 9.71% (1.7%) 7.71% 11.1% 2001E 5.44% 27.6% 4.02% 3.1% 5.27% 23.3% 14.33% 43.3% 6.00% 36.4% 4.73% 19.0% 10.90% 12.2% 10.71% 38.9% 2002E 5.77% 6.1% 6.25% 55.5% 5.74% 8.9% 15.00% 4.6% 6.00% 0.0% 5.45% 15.3% 11.50% 5.5% 15.00% 40.1%

American Express
Yr/Yr Growth

Capital One Financial
Yr/Yr Growth

Citigroup
Yr/Yr Growth

CompuCredit
Yr/Yr Growth

CCRT MWD KRB

NA 6.95% 28.0% 3.99% 19.1% 8.35% 35.6% 6.69% 39.0%

3.45% 6.90% (0.7%) 4.31% 8.0% 10.13% 21.3% 7.56% 13.0%

Discover (MSDW)
Yr/Yr Growth

MBNA
Yr/Yr Growth

Metris
Yr/Yr Growth

MXT PVN

Providian
Yr/Yr Growth

Source: Company data and Wachovia Securities estimates

According to Fitch IBCA, recent net charge-offs stood at 5.91% in September, down from a threeyear high of 6.37% in June. However, this is still 98 bps, or 20%, higher than the 4.93% in 2000. Charge-offs have been rising since September 2000, but are still far from levels seen in the 199798 period, though Fitch IBCA believes this level may be broken by the end of 2001.
Credit Card Charge-Offs
8.0%
6.93%

7.0%
6.21%

5.91%

6.0% 5.0% 4.0% 3.0% 2.0%
3.38%

5.18% 5.11%

Source: Fitch IBCA Credit Card Index

24

Credit Cards 101

Leading indicators of net charge-offs come from two sources. The first indication is in the form of loans that are delinquent, usually after 30+ days. Delinquency is defined as the cardholder failing to pay the minimum by the due date. The second is bankruptcies, which are charged off 30-60 days after notification. Because of rising bankruptcies and delinquent accounts, card companies are forced to raise the provision for loan loss. This provision is taken from earnings in good quarters and drawn from it in bad quarters. If the opposite is done, provision being taken during bad quarters, this drags down profitability. In this type of situation, card companies see profit margin squeezed. As shown in the following chart, we believe the monoline companies are well positioned to absorb this impact of higher net charge-offs, at least in the short term. The combination of strong reserves as well as strong growth should cushion much of the risk coming from the slowing economy. However, we think the larger and more successful card companies will leverage size and scale. The impact of increased charge-offs may be greater for smaller companies, as we have already witnessed at Providian and NextCard.

Pre Tax Profit +Provision As A Percent Of Receivables
Issuers built reserves to record highs allowing more capacity to absorb losses

18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% PVN

COF

KRB

MXT

1997

1998

1999

2000

Q301

Source: Company data and Wachovia Securities estimates

25

Financial Services/Specialty Finance

How Credit Card Companies Make Money
Intense competition has put pressure on all credit card operators. Since the early 1990s, as mentioned, they have lost market share, and in some cases have exited the business due to declining profitability. Following is a simple measure on how the credit card companies earn a profit and effectively out-earn their bank competition. The key to profitability for these companies rests on two important factors: the ability to effectively manage risk through (1) risk-based pricing metrics and (2) financial flexibility. Following is an outline of the income statement of a credit card company: Credit Card Income Statement Finance Charge Income Less: Cost of Funds (Interest Expense) Net Interest Income Credit Card & Other Fee Income Less: Provision for Losses Risk Adjusted Margin Less: Operating Expense Marketing Expense Income Before Taxes Less: Taxes Net Income
Source: Wachovia Securities

Net Interest Income Traditionally, a credit card company earns between 60% and 70% of its revenue from interest income. However, more recently, some of the monolines have grown larger contributions from fee income. Interest income is the money made on finance charges when purchases go unpaid by the cardholder. This is the interest rate charged to cardholders on outstanding balances according to the credit risk of the cardholder, called credit scoring, and is usually a premium above the U.S. prime rate or LIBOR.
Finance Charges: Fixed Versus Variable Portfolio Composition Company Capital One Financial Discover MBNA MXT NXCD PVN
Source: Company data

Fixed <10% 85-89% 93-94% <5% 33% 25%

Variable 90% 11-15% 6-7% 95+% 66% 75%

The finance charge less the cost of funds for the company is called net interest income. The greater the difference between interest income and interest expense, the more profitable the company. For example, most of MBNA’s loan portfolio is fixed, and therefore, its loans reprice

26

Credit Cards 101

slower, leading to wider net interest margin. Profitability also relies heavily on credit card companies minimizing their cost of funds. In order to do this, the credit card companies must be the most financially flexible of all the business models. Because finance charges can be repriced monthly, in order for net interest margin to be consistent, credit card companies must possess excellent methods of obtaining low-cost capital. Subprime companies are finding that the cost of capital, especially securitization, is becoming prohibitive. Access to low-cost capital is essential in order for the credit card company to be competitive. This not only aids profitability by keeping net interest margin high, but also allows the credit card companies to lower finance charges and keep attrition low. When companies are able to pass their lower interest rates and costs of funds to their customers, customers stay. In the industry’s current environment, as account acquisition costs rise along with increasing competition, the credit card companies must hold onto as many accounts as possible, while acquiring new cardholders to gain size and scale. We believe scale will be the deciding factor in which companies have long-term viability in the industry. The trend of consolidation should separate the largest issuers from the smaller. The smaller companies are likely to lose the ability to compete and have to sell out. Cost of capital is a credit card company’s largest single expense. Companies can either sell bonds with the pool of credit card receivables as collateral (known as securitization), or issue debt based on their own credit quality. Accordingly, a company’s credit ratings are critically important. The following chart outlines the credit ratings for the various credit card companies, both monoline and nonmonoline.
Credit Ratings--One Component Of Financial Flexibility Short Term Citigroup First USA/Bank One MBNA American Express JP Morgan Chase Morgan Stanley Disover Source: Standard & Poors A-1+ A-1 NR A-1 A-1+ A-1+ Long Term AAA BBB A+ AAAAHousehold International Providian Financial* Metris Companies CompuCredit NextCard Capital One Financial Short Term A-1 NR NR NR NR NR Long Term A BBB+ NR NR BB+

Fee Income The other portion of a company’s revenue is derived from fees. This averages between 25% and 40%, excluding American Express, and can has been as high as 50% at the monolines. This most often consists of penalty charges for late payments or annual membership fees. Another common source of non-interest income is interchange fees. Credit card companies that are on the MasterCard or Visa network receive a small percent of purchases as a reward for using their network. These companies are all the bankcards: MBNA, Capital One, First USA/Bank One, Citibank, Chase, etc. Credit card companies that operate their own network, such as Discover and American Express, also have discount fees, which is a percentage of sales volume paid by merchants for using the network. In the past ten years, the card companies have shifted their focus to fee income for its stability. Through partnerships or on their own, credit card companies are moving into selling other financial products. This includes auto and property/casualty insurance, certificates of deposit, credit counseling, fraud protection, and mutual funds. However, the card issuers have slowed the penetration of fee products in the past few years.

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for many subprime issuers to make a profit.51% (2.9% 41.19% (8.1%) 38.6% 6.0% 36.2% 29.02% (11. The credit card companies have turned to fee income to stay competitive and continue growing.43% 4. A pool of reserves is built to protect from bankruptcies and delinquent loans. respectively. is coming under pressure due to the company shifting to a lending-based model.2% (2.61% 39. Also.Financial Services/Specialty Finance Fee Trends (As A Percent Of Total Net Revenue) Full Year Company Ticker AXP COF C Yr/Yr Growth CCRT MWD KRB Yr/Yr Growth MXT Yr/Yr Growth PVN Yr/Yr Growth ## 1997 88.5% Discover (MSDW) Yr/Yr Growth MBNA Metris Providian Source: Company data and Wachovia Securities estimates Fee income is becoming extremely important for earnings growth. 36%. In the previous four years.1%) 47. MBNA and Providian had 37%.84% 2.9% 35.3%) 39.1% (1.3%) 2002E 78.8%) 38.6% (4.2% 12.0% 30. it is necessary to earn a high amount of fees because the net interest income alone is not enough to cushion losses.1% (2. due to its membership and merchant fee income. the card company builds up these reserves and accept more moderate earnings per share.4% 1033.1% 21.8%) 27.4% 37. This is a contra-asset account to income and negatively affects earnings when the provision must be increased due to rising losses.2%) 38. In 2000. which is affecting the rest of the card companies.09% 0. Providian’s fee growth is beginning to stagnate. the card company draws from the pool.44% 9.8% 41. As a result. 28 .5% 31. Difficulty is also coming from a saturated market.9% 48. a cardholder can just switch to a lower interest rate card if finance charges are too high.4%) 28.50% 2.6% 39. as well. this grew to 47%.5% 23.9%) American Express Yr/Yr Growth Capital One Financial Yr/Yr Growth Citigroup CompuCredit Yr/Yr Growth NA NA 40.7% 2000 84. which boasts the highest percent of fees per total net revenue. Capital One.8%) 49.1% (13.8% (2.21% 3. which softens the impact of losses on earnings.3% 38.0% 1. With so many credit card companies competing. respectively.51% (2.2% 5.5%) 2001E 80.2%) 48.5% 24.7% (7.0% 237.74% 16. American Express.9%) 42.4% (2. In 1997.9% NA 23.0% 28. and 49%.54% 3.1% 1998 87.2% 3. 29%. earnings.8% 27.6% 41.2%) 47. fee revenue has declined.3%) 20.2%) 43. credit card issuers are finding it difficult to make money through net interest margin alone.7% (6.89% (1.63% (0. and 31% fees per total net revenue. When charge-offs are low.4% (1.33% (1.4% 193.6%) 31.22% 14. The factor behind this slowing in fee income is the class action suit filed against Providian in May 1999. Generally. Providian and Capital One Financial have successfully implemented this. When chargeoffs are high.85% (6. Due to increasing pricing pressure.5% (1.70% NA 39.7% 1999 85.2%) 30. accusing the company of illegally charging fees to its customers.8%) 29.5% (6.34% 12.0%) 40. Provision For Losses Card companies estimate the losses they will incur in the future.1% 15.2% 20.8% (15.7%) 43.9% 40. this pool is composed of funds taken from interest income and fee income--in short.

5% 73.6% (7.5% NM 65.0% 5.4% 53.6%) 62.6% 79.6% 0.8%) 59.5% 127.5% (2.8% 50.1% 4.9% 43.0% 2002E 62.6% 32.5%) 2001E 83.6%) 73.6% 2.4% 2. (Relative To Charge-offs + Delinquencies) Loan Loss Provision 1997 73.1% 7.3% 20.3% 63. By securitizing more loans and provisioning less.5% 44.6%) 77.5% 4. Companies do not provision for securitized loans (loans that have been sold).9% 2000 78.7% 52.1% 6.5% 45.7% 43.3% 41. Charge-offs from on-balance-sheet loans are absorbed by the loan loss reserve built from provisioning.3% MBNA Yr/Yr Growth Metris Yr/Yr Growth Providian Yr/Yr Growth Source: Company data and Wachovia Securities estimates *Cardmember Lending Only 29 .1% 22.0%) 62.3%) 76.2% 2.6% 10.4%) 37.4% 49.8% Full Year Company Ticker AXP COF C CCRT 1999 76.9% (4.8%) 58.9% 46.1% 8.1% 2.2% (20.1% (3.1% 55.3% 2.0% (0.5% 1.7%) 46.1% NA 1998 75.5% 6.4% 50.5% 31.6% 37. This is a tool that credit card companies can use to manage earnings.2%) American Express* Yr/Yr Growth Capital One Financial Yr/Yr Growth Citigroup Yr/Yr Growth CompuCredit Yr/Yr Growth MSDW/Discover Yr/Yr Growth MWD KRB MXT PVN 49.6% 75.3% (5.9% 66.2% 59.8% (11.2% 60.7% (12.2%) 9.1% 53.Credit Cards 101 An important fact to be aware of when looking at provision levels is that most companies provision only for on-balance-sheet loans.6%) 67.5%) 73.8% 22.0% (9.0% 44.4% (6.4% 62.5% 69.6% 73.1% (1.3% (5.2% 45.1%) 16. the company can use more income for earnings.3% (25. while charge-offs from the securitized loans are a direct charge to income.6% (42.8% 75.8% 8.9% 80.

1% 15.0% 22.32% (6.5%) 12.8%) 4.3% 14.37% 37.1%) 7.22% (3.01% NA NA 7.74% 5.22% 4.4%) 14.6% 4.5% 7.82% 8.5%) 18.3%) 4.80% (16.42% 18.3% 4.1%) 15.36% (1.63% 6. these companies carry very little interest rate risk. The calculation for risk-adjusted margin is as follows: Risk-Adjusted Margin Calculation Net Interest Income +Non-Interest Income Less: Net Charge-Offs Risk-Adjusted Revenue Source: Wachovia Securities This ratio can vary in different operating environments and depends greatly on how well a company manages both favorable and adverse conditions.13% (28.3% 6. despite a fluctuating rate environment.78% 13.5%) 8.7%) 16.2% 7.96% (8.5%) 7.15% 19.69% 34.44% (3.57% 13. in our view. analyzing companies through their risk-adjusted margin is the most appropriate way to view credit card companies on a level playing field.97% (8.3%) 15.1% 8.1%) 17.6%) 7.08% (14.00% (6.3%) 7.1%) 12.44% 5. Risk-adjusted profitability is one of the best barometers of how well a particular company is operating.60% 5. Risk-Adjusted Revenue Average Managed Receivables = Risk-Adjusted Margin (As A Percent Of Average Managed Receivables) Risk-Adjusted Margin Full Year Company Ticker 1997 1998 1999 2000 2001E 2002E American Express* Yr/Yr Growth AXP 18.6%) 6.8%) 4.2% 13.51% 41.9% 7.23% 6.29% (44.17% (19.18% (4.47% 41.50% 12.17% 10.1% 25.46% 1.9% 9.39% (5.0%) 11.8% 17.1%) AXP Cardmember Lending** Yr/Yr Growth Capital One Financial Yr/Yr Growth COF C CCRT KRB MXT MWD PVN 9.3% 11. Credit card companies are the most nimble of all finance companies in their ability to reprice on a monthly basis.08% 3.3% 9.11% (8.58% (4.2%) 11.0% 12.87% 6.45% (0.37% (1.09% 1.4%) 12.03% (0.43% Citigroup Yr/Yr Growth CompuCredit Yr/Yr Growth MBNA Yr/Yr Growth Metris Yr/Yr Growth MSDW/Discover Yr/Yr Growth Providian Yr/Yr Growth Source: Company data and Wachovia Securities estimates * ** Includes revenue from charge card and credit card Net of credit card fees 30 .37% 0.5% 13. Thus.5% 7.71% 10.2% 12.38% (16.45% 1. It allows for an apples-to-apples comparison across an industry by basing profitability on how well a company earns revenue from its receivables base.12% 25.1%) 18.69% 0.95% (9.80% (18.1% 18.Financial Services/Specialty Finance Risk-Adjusted Margin As different companies take on differing risk with varied cost-of-capital advantages and disadvantages.05% (50.7%) 14.33% 5.

the firm is operating inefficiently.1% $3.97 26.75 32. If the ratio of expense to revenue is too high.0% $1.8% $1.3% $1.5%) 2000 $2. Expenses The credit card company has two major costs besides interest expense: operating and marketing costs.7% $0.0% $2.0% $2.94 60.5% $1.93 26.0% $2.38 6.1% 2001E $1.16 6.7% $0. and salaries.13 1999 $1. However.8% $1.5% $1.8%) $2.6% $3.15 11. which provided a relief from the intense pricing pressure created by the teaser wars of the largest mailer and from a period of lower charge-offs due to economic growth and low unemployment. When evaluating a company.00 NMF American Express Yr/Yr Growth Capital One Financial Yr/Yr Growth COF Citigroup* Yr/Yr Growth C NA CompuCredit Yr/Yr Growth CCRT NA $0. the higher the risk-adjusted margin earned.21 32.7% 1998 $1. Also. the stocks with higher risk-adjusted margin are discounted by investors.5%) $3.5% $4.80 8.40 13.34 18.57 22.5% $0.1% $1.0% $1.77 54. advertisements.73 44. it is important to look at expenses relative to revenue (efficiency ratio).4% $0.0% $0.2% $0.15 17.9% $0.1% $1.3% $2.94 (0.76 29. Marketing expense is designed to grow the business and include direct mailing.7% $4.72 30. due to the greater beta (risk premium) on potential losses in the riskier segments of the market.0% $1.89 (7.7% MBNA Yr/Yr Growth KRB Metris Yr/Yr Growth MXT Providian Yr/Yr Growth PVN Source: Company data and Wachovia Securities estimates *Data represents only North America Credit Cards segment 31 .0% $2.76 (35. Its higher risk-adjusted margin is a result of its network fees. the greater the risk assumed. Typically. The one exception here is American Express.91 29. a drastic pullback in marketing could imply that a company is sacrificing future growth for present performance.07 14.54 11.1% $0. not greater lending risk. We forecast margin to be lower for this year and next. The following chart shows the efficiency ratios at the major card issuers. and trial offers. These are necessary in maintaining the business.05 18.03 (42.8% $3.1% $2. Risk-adjusted margin in 1999 and 2000 was above the average mainly because of the absence of First USA from the market.1%) $2.72 0.08 NA $0.93 20. Operating expense results from servicing portfolios.81 17. mainly because of First USA’s re-emergence as a large mailer and higher charge-offs.26 20.09 48.4%) 2002E $1.2%.0% Discover (MSDW) Yr/Yr Growth MWD $2.33 20. costs to operate the network (if present).11 49.75 16.Credit Cards 101 The group has an estimated risk-adjusted margin in 2001 of 13.01 (36.6% $0.21 25.42 50.04 53.50 20.32 41.53 27.7%) $1.4% $0.9% $1.66 129.8% $1. Earnings Per Share Full Year Company Ticker AXP 1997 $1.24 30.14 (44.

20 (12.5%) $51. we believe these strategies allow companies to deliver the best earnings results. (Net Income Per Average Account) Profitablity Per Account 1997 1998 $31.10 (7.9%) $54.7% 2001E $35.5% $47.19 (8. We believe capturing a growing fee income from innovative products would also help to increase profitability. The following table presents our evaluation of our companies based on their net income per account.2%) $20. KRB.02 (1.63 Citigroup Yr/Yr Growth C $20. Inc.08 5.12 Full Year Company Ticker AXP 1999 $38.7% $0.32 (9.1% 2000 $39.33 (44. maintains a market in the common stock of CCRT.70 $21.65 7.5%) $34.47 (10.29 (0.4% $55.60 Capital One Financial Yr/Yr Growth COF $18.3%) $19.15 (46.9%) $17.66 8.4%) $54.68 2.4% $17.0%) American Express** Yr/Yr Growth $27. CCRT. First Union Securities.3%) 2002E $26. 32 .81 CompuCredit Yr/Yr Growth CCRT MWD MXT NA $11. and provisioning for losses successfully.9%) $14.79 60.0%) $48.81 (48.42 (25.09 $18.13 19.78 2. Inc. managed or comanaged a public offering of securities for AXP.5%) $15.81 40.23 15.51 3.92 15.32 (15.6% $21.2% $96.00 (100.5% $235.86 12.95 (7.9%) $174.63 2.6% $54.11 (2.1%) $21. In conjunction with controlling expenses.9% $23. COF.2%) $19.6% $16. and MXT within the past three years.59 (9.6% $19.Financial Services/Specialty Finance The Bottom Line--Profit The companies that can best manage their assets and liabilities will get the most from net interest income.26 NA Discover (MSDW) Yr/Yr Growth Metris Yr/Yr Growth Providian Yr/Yr Growth PVN Source: Company data and Wachovia Securities estimates *MBNA omitted due to lack of account statistics **Significantly lower than revenue per acct due to high expenses Additional Information Available Upon Request First Union Securities.20 (25.35 3.2%) $16. avoiding risky accounts.4% $28.2% $59. C.7%) $17.76 59.7% $14. or a predecessor.20 11.

Credit Cards 101 Appendix A 33 .

8% $57.126 24.0% $32.2% $107.6% $109.994 16.8% $37.547 47.055 13.396 5.8% $92.400 23.8% $7.245 0.483 28.0% $12.915 20.700 6.4% $104.1% $1.939 22.380 58.641 20.700 7.9% $33.2% $56.4% $54.396 5.718 24.744 51.8% $60.0% $67.425 11.341 7.105 4.8% $50.4% $56.2% $103.115 13.900 24.9% $32.704 10.0% $1.586 11.493 17.0% $87.674 2.283 61.994 16.9% $62.585 9.6% Company Ticker American Express AXP Yr/Yr Growth Capital One Financial $14.5% $1.254 31.145 12.4% $2.2% $40.547 47.5% $5.219 9.237 16.273 27.800 22.0% $59.232 11.9% MWD Yr/Yr Growth MBNA $49.395 22.9% $1.590 54.358 11.2% $88.405 28.681 20.300 12.2% $108.124 20.34 Managed Receivables Full-Year 1997 $38.0% $110.8% $65.9% $43.9% $50.4% $11.6% $9.0% $60.256 21.800 $17.123 29.502 (9.1% Q302E $66.0% $32.489 59.4% $102.4% $35.770 11.672 42.6%) $37.447 14.9% $51.8% Q402E $67.955 17.600 11.8% $37.2% $35.0% $57.3% $30.0% $99.0% $12.497 46.1% $1.026 0.4% 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E Quarterly Quarterly Q202E $63.100 15.0% $90.6% $3.581 13.651 22.6% $35.0% $49.0% $13.2% $20.7% $54.700 16.5% $9.363 11.1% $65.017 55.528 70.704 0.950 CCRT Yr/Yr Growth Discover (MSDW) $32.232 31.581 13.807 6.4% KRB Financial Services/Specialty Finance Yr/Yr Growth Metris MXT Yr/Yr Growth Providian PVN Yr/Yr Growth Source: Company data and Wachovia Securities estimates .524 45.9% $54.9% $97.024 24.9% CompuCredit $899 20.5% $45.100 10.000 12.8% $72.100 8.0% $54.500 36.625 44.5% $31.0% $11.144 29.9% $43.674 8.7% $49.227 14.4% COF Yr/Yr Growth Citigroup $85.0% $108.5% $10.547 119.427 22.0% $27.3% $29.5% $28.0% NA $78.900 24.105 17.680 10.281 37.9% $97.0% $113.5% $97.1% $53.8% $1.807 6.2% $38.425 11.674 2.0% $12.0% $11.8% $32.9% $100.5% $60.0% $2.231 11.980 18.315 49.145 12.124 20.975 16.115 13.7% $1.3% $11.0% $113.3% $1.166 9.417 18.681 20.700 14.0% $9.5% $107.9% $111.9% $55.551 55.425 6.9% C Yr/Yr Growth NA $899 $2.0% $102.4% $11.8% $47.104 8.744 51.680 10.805 36.0% $21.586 10.475 13.3% $53.300 20.723 30.

9% 14.3% 5.50% 5.00% 6.8% 3.71% 38.90% 26.98% 18.27% 23.64% 34.00% 31.00% 115.3% 5.00% 53.0% 5.45% 11.0%) 3.7% 5.00% 50.0% 5.90% 12.90% 14.82% 22.7% 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E Quarterly Q202E 5.25% 55.6% 14.95% 28.0% 6.00% 0.1% 6.79% 38.7% Company 6.8% MBNA 3.2% 4.00% 20.42% (21.9% 6.3% 14.60% 9.02% 3.5%) 9.1% 5.51% 27.1% 6.77% 6.22% 26.8%) 6.7% 4.1% KRB Yr/Yr Growth 4.2% 10.7% 3.00% 36.75% 4.(As % of Average Managed Receivables) Net Charge Offs Quarterly Full-Year 1997 6.0% 9.56% 13.8% 13.9% 11.5% 10.84% 4.35% 35.75% 36.92% 3.29% 38.77% 41.00% 20.99% 19.2% 6.69% 39.0% 4.4% 6.0% 15.10% (5.25% 35.80% 76.1% 6.8% 1.9%) 3.40% (18.2%) 7.00% 0.75% 18.7% 4.44% 27.25% 6.94% (8.12% (19.7% 5.5% NA 3.73% 19.51% 39.00% 3.00% 39.3% MWD Yr/Yr Growth 5.26% (14.00% 78.5% 6.71% (1.2% 13.1% 5.4% 15.7% 10.8% 0.3% 15.45% 13.75% 4.25% 31.90% (0.7%) 10.8% 14.0% 10.00% 4.8%) 5.8% 4.00% (21.3% 4.6% 6.6% 5.70% 29.00% 78.45% 25.85% (24.2% 5.71% 11.9% 4.35% 7.13% 21.8% 30.60% 73.25% 3.67% 5.10% 10.9%) 4.31% 8.1% 10.2% Ticker American Express AXP Yr/Yr Growth Capital One Financial 6.3% COF Yr/Yr Growth Citigroup 4.5% 5.2%) 3.79% 2.3% 7.3% 6.60% 30.8% 15.34% 53.34% 30.6% 5.33% 43.75% (3.00% 78.50% (5.45% 15.9%) 5.00% 5.1% 9.2% 11.3% 5.6% 10.5% 3.75% 19.90% 1.9% 5.97% (3.74% 8.9% 15.60% 73.0% 5.5% 10.1% 8.9% CCRT Yr/Yr Growth Discover (MSDW) 6.00% 40.87% (2.7%) 5.00% 25.7% Q302E 5.90% 11.5% Metris MXT Yr/Yr Growth 12.00% 26.4% NA 5.3% 11.91% (13.70% 52.4% 15.4%) 4.2% 11.45% 3.0% 4.9%) 13.3% 4.45% C Credit Cards 101 Yr/Yr Growth CompuCredit 4.0%) 4.7% 6.5% 13.3% 5.6% 5.1%) 3.5% 5.4%) 4.1% 5.75% 75.20% 43.50% 5.8% 5.0% 6.3% 14.1% 13.00% 78.5% 5.7% 11.40% 6.98% 0.7% Q402E 5.0% 12.3% 10.28% (12.8% 6.75% 0.6% Providian PVN Yr/Yr Growth Source: Company data and Wachovia Securities estimates 35 .

89% 16.3% 2.60% (5.03% 23.0% 4.50% 9.Financial Services/Specialty Finance Delinquencies (As A Percent of Ending Total Managed Receivables) Full-Year Company Ticker AXP 1997 3.13% Loans Delinquent 90+ Days* Yr/Yr Growth Metris Total Delinquencies Yr/Yr Growth Loans Delinquent 90+ Days Yr/Yr Growth MXT Providian Total Delinquencies Yr/Yr Growth Loans Delinquent 90+ Days Yr/Yr Growth *owned 1 PVN 4.4% 41.3%) 2.1%) 0.5%) 3.90% (1.90% (5.60% 4.82% 4.23% 11.80% (11.0%) 5.4% 5.90% (0.22% 26.33% 8.4% 0.65% 15.6% 14.5% 9.0% 1.67% 34.1%) 8.4% 2.65% 29.4%) 5.20% (2.6% 7.8% (7.20% 36.4% 35.0% 13.6% 18.7% 36.4% 4.7% 1999 2.56% 3.1% 5.23% (9.4% 4.90% 0.9% 3.4% 41.9%) 4.30% (2.8% 14.3% 4.91% (11.50% 20.7% Q401E 3.9% 1.3% (0.90% 7.20% 20.1% 1.8% 4.1%) 1.7% 1.60% 0.0% 8.4% (4.1% 2.4% (16.8%) 4.65% 1.00% 25.4% 41.4%) 8.5% 3.12% 13.0%) 3.98% 42.2%) 2.8% 2.89% 16.76% (26.0% 1.6% 2001E 3.00% 0.0%) 5.1%) 2.1% 3.60% (12.20% 2.4% 41.6% Q101A 2.30% 18.3% 14.76% 6.30% 10.33% 26.5% 0.6% 29.90% (25.1% 5.0% 5.7% 3.71% 13.4% (6.5%) 5.9%) Q102E 3.8%) 2.6%) 0.3% 13.0% 1.0%) 5.0% 6.2% Q301A 3.4% (22.8% 0.0%) 5.42% 10.90% 15.4% 1.72% (10.1% 2.6% 7.2% 10.3%) 5.3% 1.5% 8.60% 5.3% (8.7%) 6.4% 1.4% (31.1% 6.2% 5.0%) 4.6% 7.89% 16.23% (8.3% 5.8% 36.60% (16.0% MBNA Total Delinquencies Yr/Yr Growth KRB 4.00% 25.1% 5.00% 0.90% 7.5% 3.0% 13.3%) 3.3% 60.3% (5.45% (3.3% 1.2% 5.4%) 1.2% 0.65% 0.3% 34.4% 7.89% 16.9% 1.8% Quarterly Q201A 2.5% 13.0% 3.8%) 2.8% 36.8% 6.7% 4.7% 48.0%) 4.0% 5.3% 34.2% 13.0% American Express Total Delinquencies Yr/Yr Growth Loans Delinquent 90+ Days Yr/Yr Growth Capital One Total Delinquencies Yr/Yr Growth Loans Delinquent 90+ Days Yr/Yr Growth Citigroup Total Delinquencies Yr/Yr Growth Loans Delinquent 90+ Days Yr/Yr Growth 1 Concentration on super-prime market leads to lower COF 6.8% 1.0% 6.4%) 4.4% 1.4% 41.0%) 2.4%) 8.65% 7.4%) 2.9% 1.4% 13.2% 3.89% 16.7%) 2002E 3.8% 1.0% 13.95% 9.7% 1.3% (11.00% 0.3%) 4.3% 23.3% 13.7% 8.08% (2.5% 7.0% 5.50% 1.23% (14.8% 3.88% Source: Company data and Wachovia Securities estimates Issuing to the under-served market yields wider net interest margins.0% 5.45% 18.0% 5.2% 3.9% 2000 2.9%) 1.90% (5.9% 0.5%) 4.1%) 3.2% 5.7% 6.3%) 9.23% 19.1%) Q402E 3.3%) 1.8% 1.4%) 1.0% 6.5%) Q302E 3.1% (28.6%) 0.7% 1.4% (13.8% 4.8% 2.9% (13.5% 27.7% (31.6% 7.5% 1.3%) 1.8% 23.90% (25.2% 4.7% (19.8% 49.43% (6.90% (8.23% (14.90% (18.5% 9.4% 2.9% 1.20% 36.95% 6.2% 3.88% 10.2% 3.3% 4.9% (6.50% 20.3% 4.0% 6.2% 3.2% 8.94% 11. as well.3% 34.92% (8.6% 7.45% (3.8% 18.5%) 4.0% 4.3% (3.50% 26.04% (5.3% (8.50% 26.8% 1.8% 4.90% 5.5% (10.2%) 6.0% 5.3%) 4.70% (24.4%) 4.3% 3.0%) Quarterly Q202E 3.8% 72.0% 8. Represents Credit Card Segment Data 36 .2% 3.30% (3.30% (10.2%) 1.2%) 7.6% 7.20% 20.4% 4.40% C 5.3% 34.23% 0.2%) 3.0% 6.3%) 4.9% 4.27% 4.60% 4.90% 11.1% 8.5% (36.00% (10.23% (14.90% 15.95% (5.0% 3.7% 1. but higher delinquencies.3% (16.9% 0.0% 6.0%) 1.5%) 5.3%) 2.95% (5.3%) 2.9% 29.90% 0.4% 6.3%) 7.5% 4.4% (14.9%) 4.6% 2.9% 10.3% 5.23% (7.1% 0.65% 12.89% 16.66% 6.60% (0.90% 20.00% (3.2%) 4.1% CompuCredit Total Delinquencies Yr/Yr Growth Loans Delinquent 90+ Days Yr/Yr Growth Discover (MSDW) Total Delinquencies Yr/Yr Growth Loans Delinquent 90+ Days Yr/Yr Growth MWD 7.5% 1.90% 7.2%) 2.23% 0.64% 33.00% (6.0%) 14.5% (6.4% 55.65% 5.57% 2.8% 8.10% (11.0% 6.4% 37.3% (12.90% 7.9%) 1.9%) 3.4% 8.1% 1.7%) 13.10% 1998 3.60% 0.20% 23.20% 33.4% (16.28% 8.20% (8.3% (12.5% 3.9% 6.89% 7.4% 7.94% 11.1% 3.30% (4.00% 1.90% 12.1%) 5.0% 7.8% 4.90% 7.60% 6.3%) 2.9% 3.4%) 4.99% 13.20% (8.54% (7.7% 19.4% 3.0% 3.1% 5.81% (12.0% 4.1% 4.7% 48.0% 5.23% (0.4%) 0.0%) 1.22% 1.3% 1.55% 13.30% 8.5% 39.30% (17.3% 34.0% 4.9% 29.3% 5.63% (2.60% 4.0% 8.7% 6.4%) 8.1%) 1.52% 32.00% 5.4%) 1.3% (7.90% 0.3% 15.9% 3.1% CCRT 6.2%) 5.4%) 4.

3% (19.4% (1.7% 56.8% 30.2% Q402E 61.4%) 34.6% 6.1%) 34.55% (7.13% (4.70% (4.3% 0.7% MWD Yr/Yr Growth MBNA KRB Yr/Yr Growth Metris MXT Yr/Yr Growth Providian PVN Yr/Yr Growth Source: Company data and Wachovia Securities estimates *Operating Expenses as percent of Total Net Revenue 37 .7% 60.5% 43.37% (0.8%) 57.6%) 29.4%) 34.05% 837.1%) 34.2% (5.3% (4.2%) Q301A Q401E Full-Year 1997 60.3% 40.0% 63.9%) 47.0%) 41.4% 38.7%) 26.6%) 53.2%) 30.8% 41.21% 24.6% Q302E 61.7% 0.7% 1.5%) 37.3% (2.1%) 41.1%) 30.5%) 29.9% 57.1%) 29.5% 14.2% (2.9%) 30.3% (19.1%) 36.0% 56.8%) 30.45% 7.8%) 32.2% 8.28% (6.2% NA 28.7% (7.3% (19.42% (2.4%) 30.57% (6.2%) 41.8%) 34.4% (13.8%) 60.8% (5.2%) 60.6%) 30.7% 47.1%) 48.8% 0.9%) 39.2% (5.29% (15.6%) 58.7% 63.1% 56.6% (1.12% (13.12% 1.1% (6.3%) 32.2% 10.7% (13.8%) 36.82% 20.1% 34.2%) 36.28% (1.6% (9.29% (1.5% (14.59% (0.14% (7.6%) 38.77% (8.1%) 35.2% 39.6%) 60.2%) 35.85% (14.9%) 40.7% 37.5% 7.1%) 1998 1999 2000 2001E 2002E Q101A Quarterly Q202E 60.80% 1.3% (19.41% (5.7% (1.6% 3.3% (16.3% 62.1% (7.4%) 31.2%) 38.5% (6.0% (20.9%) 41.8%) 45.5% (5.5% (5.53% (5.3% 1.2%) 31.1% 41.(as % of Total Net Revenue) Efficiency Ratios Quarterly Q201A Q102E 59.4% 56.62% (18.1%) 56.1%) 34.0% (23.36% (9.3%) 26.32% (6.7%) 35.5% (14.0% NA NA 37.57% (6.6% (8.20% 20.4%) 38.95% (4.9%) 42.91% (5.1%) 34.1% NA 41.1%) 34.5%) 42.4%) 60.6%) Company Ticker American Express AXP Yr/Yr Growth Capital One Financial COF Yr/Yr Growth Citicorp C Credit Cards 101 Yr/Yr Growth CompuCredit 40.9% CCRT Yr/Yr Growth MSDW/Discover 44.7% 32.9% (10.3%) 38.1%) 30.5% 31.3% (19.6% (21.93% (2.7%) 30.4%) 43.3% (7.16% (0.5%) 40.83% 1.7% (13.70% (18.1%) 57.02% (8.0%) 61.2% (6.6%) 37.0% 4.0%) 30.9% 64.9% 9.7%) 30.51% (6.30% (0.0% (10.9% (13.39% 1.26% (5.3%) 36.3%) 60.24% 4.1% 46.6%) 36.8% 41.8%) 38.4% 1.9%) 31.13% (3.72% (5.1%) 31.8% (8.85% (11.8%) 30.0% 36.6%) 30.16% (9.9% 5.0%) 34.61% 24.89% (4.3% 0.3% (12.2% 6.0% 56.0%) 29.5% (13.6% (3.3% 36.7%) 30.2% 1.17% (2.8%) 60.73% (2.

00 26.29 11.31 34.7%) $584.4% $175.86 $188.0% $163.3% $209.18 3.2% $292.86 (6.6% $141.36 88.8%) $250.8% $338.18 (31.4% NE NE Q302E $478.01 9.2% $39.2% $60.15 54.7% $148.30 73.0% COF Yr/Yr Growth CompuCredit NM CCRT NA Yr/Yr Growth MSDW/Discover MWD Yr/Yr Growth MBNA KRB Yr/Yr Growth Metris MXT Yr/Yr Growth $235.8% NM NM $171.22 (36.01 272.13 48.8%) $59.55 6.63 (36.1%) $100.61 352.7% $138.6% $251.8%) $158.7% $85.7% NM NM 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Quarterly Quarterly Q202E $252.15 NM* $377.05 198.602.0% $85.5%) $372.4%) $286.9% $129. and more dollars spent per new account.3% $244.57 16.9% $2.02 440.53 $131.81 (14.7% $119.2% $129.4% $440.75 (40.5%) $197.00 177.1% $275.9% $184.17 56.88 (54.78 39.5% NM NM $156.70 52.44 (57.33 13.05 6.49 (37.12 112.6% $679.29 23.60 (19.2%) $104.66 NM $2.24 22.33 19.2% $210.86 (3.83 17.5% AXP Yr/Yr Growth Capital One Financial NA NA $120.0% $245.7% $157.53 1081.47 83.72 33.36 (28.9% NE NE Q402E $703.17 324.7% $235.35 (12.74 88.145.67 336.02 5.38 Marketing Spend Trends (Per net new account added) Full-Year 1997 Q102E $136.69 50.67 38.70 13.4% $68. *MBNA estimate annualized * No net new accounts added .08 (3.40 158.0%) $163.8% $95.94 323.2% $223.3%) $388.8%) $960.1% NE NE NE NE # $825.12 NM $155.09 (49.3%) $104.00 $71.8% NM NM NM NM $89.1%) Providian PVN Financial Services/Specialty Finance Yr/Yr Growth Source: Company data and Wachovia Securities estimates Increasing competitiion for wallets have led to increased spending.3% $496.3% $265.20 (4.00 (28.04 19.34 30.36 (46.1% $56.4%) $314.32 2.81 146.8%) $315.1%) $236.0% $749.3% NE NE Company Ticker American Express $90.0% $141.51 104.1% $257.7% $286.04 207.10 7.50 NM NE NM NE NM $322.9% $154.3% $184.34 $61.53 284.53 132.00 $34.0%) $345.44 (88.47 5.3%) $192.

8% 41.93% (3.3% 35.2%) 39.1%) 47.5%) 31.8% (15.82% (0.2%) 20.63% (0.6% 40.0%) 28.74% 16.5%) 37.4% (9.7%) 38.5% 85.41% (10.2%) 79.51% (2.6% 47.2%) 38.61% 39.7%) 1998 1999 Quarterly Q202E 78.22% 14.7%) 20.4%) 81.3%) 40.5% MWD Yr/Yr Growth MBNA KRB Yr/Yr Growth Metris MXT Yr/Yr Growth Providian PVN Yr/Yr Growth Source: Company data and Wachovia Securities estimates 39 .8% 43.5%) 38.99% 11.7% 39.06% 0.9%) 80.9% 41.9% (6.4% 193.4% 1033.2% (4.0% 30.50% 2.1% 21.41% (5.16% 2.0%) 40.3% (8.1%) 29.7% 29.8%) 27.2% 39.5% 20.7% (6.89% (1.8%) Q302E 78.2%) 82.43% 4.0%) 38.2% (17.4% (10.5% (5.21% 3.3%) 47.60% 12.2%) 78.6% 35.3%) 30.4% (2.2% (8.10% (0.1% (6.4%) 40.09% 0.2% 5.5% (6.54% 3.1%) 20.0% 1.2%) 28.4%) 28.19% (16.6%) 48.6% 41.3%) 39.Fee Trends (As A Percent Of Total Net Revenue) Full Year Quarterly 2000 84.9%) 30.8%) 28.0% 36.9%) 42.44% 9.02% (11.1%) 38.33% (1.8%) 38.42% (3.5% 24.8% 20.7% (7.6%) 35.0% 38.7%) 19.2%) Q402E 78.1% (13.1% (2.16% (0.3% 49.34% (0.8% 4.1% (9.2% (13.7% (7.0% 28.66% (3.7% (6.8% 35.5% 27.8%) 31.6%) 20.7%) 35.84% 2.3%) 49.19% (4.6%) 47.82% (2.3% (2.9% 23.19% (8.0% 237.5%) 47.7% 29.9% (3.8%) 30.19% (13.8% (6.3% 29.4%) 48.8%) 39.4% (1.62% (2.98% (8.82% (3.7%) 45.8%) 32.3%) 38.2%) 78.9%) 29.18% (2.8% (6.9% (20.8% (10.4% 87.91% (0.1% AXP ## Yr/Yr Growth Capital One Financial NA NA 40.1% (1.5% (24.18% 0.18% 3.1% (6.9% 28.2% 12.2% 1.2% 47.5%) 38.5% (1.2%) 30.1% (6.0% (4.6% (4.4%) 39.9% 48.3%) 38.8% (2.1% 15.7%) 47.5%) 28.19% (4.7%) 2001E 2002E Q101A Q201A Q301A Q401E Q102E 1997 88.5%) 43.15% 3.7% (3.8%) 21.5% (4.1%) 38.2% 3.1%) 38.0% 29.2%) 79.9%) 47.4%) 37.55% (22.2%) 39.4%) 20.2% COF Yr/Yr Growth Citigroup C Yr/Yr Growth Credit Cards 101 CompuCredit CCRT Yr/Yr Growth Discover (MSDW) 29.19% 1.70% NA 39.34% 12.51% (2.93% (8.9% NA 23.2% 0.3% (5.0%) 32.7% Company Ticker American Express 37.47% (8.9%) 31.8% (6.4%) 38.7%) 22.6% 6.9% (6.85% (6.82% 2.43% 1.2% (2.5% (6.7% 49.

1% 13.9% 14.5% 12.6% 13.3% 8.8%) 9.7% 0.1% (4.1%) 10.5% 9.8%) 10.1%) 9.3% 15.2% 20.6%) COF Yr/Yr Growth Citigroup* NA 19.1% 14.0% (4.6% (3.2%) 12.1% 7.1% 7.5% 10.3% 11.0% 10.5%) 13.6% (10.4%) 9.9%) 14.9% NA 9.9% 14.2%) 9.3% 9.4%) 12.8% (7.9% 9.2% (0.0% 8.6% 18.9%) 8.3% 0.0% (5.7%) Company Ticker American Express 9.8% 4.1% (6.9% (0.0% 14.7% (16.1% 9.7%) Source: Company data and Wachovia Securities estimates .4% 7.6% 10.6% (0.8% 12.9% 12.5% 8.7% 9.3% 8.6% 10.8% 11.0% 14.2% 10.9% 12.9%) 10.7%) 13.8% (0.5% 8.4% 12.9% 0.8% 2.3% 21.7%) PVN Yr/Yr Growth 12.4%) 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E Quarterly Quarterly Q202E 10.2% (10.4% 20.3% 10.8% 10.9% (3.5% 0.9% 9.5%) 8.0% 9.7% 8.8% (2.9%) Q402E 10.8% (2.5%) 22.6%) 9.0% (0.8%) 14.3% (1.5% 2.8% (0.0% 13.9% 14.6% (9.9% 1.8% (1.1%) 12.1% 12.8% 6.1% (4.0% 13.9% (0.5% 8.2% 9.1% 2.6% AXP Yr/Yr Growth Capital One 10.0%) 21.1% 8.0% 16.3% 10.4% 1.8%) 9.0% 9.1% 10.7% 14.1%) 9.3%) 9.4% 13.5% 4.6% 10.2%) 9.8% 5.9% 3.6% (11.4% 7.2% (7.2% (0.8% 9.5% 7.6% 13.1% C NA NA Yr/Yr Growth CompuCredit CCRT Yr/Yr Growth Discover (MSDW) MWD Yr/Yr Growth MBNA KRB Yr/Yr Growth Metris 11.3% 10.9% 10.6% (4.40 Net Interest Margin Trends (As A Percent Of Average Receivables) Full-Year 1997 10.6% 0.0% (5.2% 13.0% 21.1% 5.6% 1.6% 10.4% 8.4% 21.1%) 8.7% 7.8% (0.2% 8.9% 8.8% 1.7% 9.0% 0.0% 12.6%) 20.8% 7.6% 2.2% (8.0% 3.3% 1.6% 10.0% (2.5% 10.3%) 8.9% 8.5% 22.4%) 21.1% (4.7%) 21.9% (3.7% 0.0% 10.0% 2.0%) 8.9% 18.8% (0.6% 2.6% 11.2% 8.4%) 9.0% 3.1% 10.6% 12.2% 9.8% 8.0% (2.5% 8.2% 14.0% 8.0% (5.9% 23.1% (0.3% 10.9% 21.7%) 10.7% (1.3% 6.5%) Q302E 10.0% 22.2% 4.7%) 21.6% 8.2% 5.7% (1.7% (0.7% 11.9% 9.2%) 9.9% MXT Financial Services/Specialty Finance Yr/Yr Growth Providian 11.0% (3.9%) 7.

0%) 4.75% (8.75% (4.5%) 1997 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E Quarterly Q202E 15.00% (6.10% (0.87% 6.05% (41.40% (16.96% (8.08% (14.66% (4.37% (1.0%) 7.2% 18.9% 7.36% (1.1%) 4.4%) 7.18% (4.72% (5.80% 0.46% 1.5%) 15.05% (46.2%) 11.0%) 13.2% 13.3% 13.26% (13.1%) 5.6% 15.6%) 4.12% 25.8%) 7.80% (17.9%) 13.7%) 13.84% (10.33% 5.3% 11.5%) Company American Express* Yr/Yr Growth AXP Cardmember Lending** Yr/Yr Growth Capital One Financial Yr/Yr Growth Citigroup Credit Cards 101 Yr/Yr Growth CompuCredit Yr/Yr Growth 6.35% (14.35% 0.08% 3.5% 7.31% (17.10% 4.35% 3.81% (1.20% (48.0%) 8.00% (11.20% (25.4%) 14.38% (16.7%) 12.05% (5.4%) 8.9% 4.7%) 7.2% 7.0% 14.1% 9.6%) 7.93% (6.00% (8.1%) 6.0%) 6.3%) 12.1% 7.11% (8.22% (10.0%) 13.13% (28.5% 14.57% NA 22.43% 8.6% 12.91% (10.3%) 16.65% (1.99% (12.80% (5.32% (6.10% 0.3% 4.10% (30.09% 1.05% (50.39% (5.7% 7.3% 9.5%) 8.0%) 11.1%) 12.45% (0.99% (36.69% 12.4%) 16.7%) 14.82% 7.1% 11.12% 12.4%) 8.78% (5.6%) 15.80% (16.1%) 7.6%) 8.7%) 7.3% 7.98% (0.7%) 12.6%) 15.9%) 7.65% (9.24% (32.0% 7.03% (0.74% 5.15% 2.02% (9.05% (3.7%) 15.65% (9.14% (0.2%) 15.95% (9.22% 18.50% (5.51% 41.83% (6.2%) 13.5%) 6.80% (18.(As A Percent Of Average Managed Receivables) Risk-Adjusted Margin Quarterly Full Year Ticker AXP 4.4%) 12.8%) 6.50% 12.69% 34.3% 7.97% (3.63% NA 6.98% (4.1% 16.4%) 7.9%) 3.2% 4.1%) 7.5% 14.2% 14.8% MBNA Yr/Yr Growth Metris Yr/Yr Growth MSDW/Discover Yr/Yr Growth Providian Yr/Yr Growth Source: Company data and Wachovia Securities estimates * ** Includes revenue from charge card and credit card Net of credit card fees 41 .47% 41.27% (40.10% (0.01% 14.6%) 16.5%) 12.5% 7.5%) 11.97% (8.17% (19.4%) 4.78% 13.5%) 8.0% 14.10% (5.1% 8.80% (20.69% (4.17% 10.35% 1.6%) 4.7%) 16.3% 7.93% 7.1%) 14.3%) 7.26% (13.2%) 7.45% (17.7%) 8.44% 5.56% (15.6%) 15.31% 1.71% 13.1%) 18.5%) 16.29% (44.05% (4.45% 1.05% (27.4%) 4.7%) 8.44% (3.0% 25.22% (3.4%) 9.3%) 17.15% 19.37% 37.69% 0.26% (13.41% (14.40% (5.42% COF C CCRT KRB MXT MWD PVN 10.8%) 7.6%) Q302E 14.5%) 12.23% 6.58% (4.1% 4.51% 5.4%) 8.95% (4.0%) 12.9%) 13.95% (12.0% 7.92% 1.9%) 12.35% (7.2%) 9.35% (5.60% 5.4%) 17.40% (1.3%) 18.05% (12.1%) 14.6%) 7.3%) 15.5%) 4.8%) 15.8%) 18.37% 0.5%) Q402E 18.97% (13.9% 12.

7%) 52.6% 79.2% 73.0% 75.5%) 59.7% 76.1% 2.5% 7.5% 12.7% 55.4% 52.9% 63.7% 53.5% 78.3% 20.1% 8.6%) 62.0% 83.6% 3.3% (5.1% 7.0%) 62.1% 53.9% (4.1% 52.4% 75.7%) 75.4% 62.4% 56.2% 24.3% 57.3%) 62.1% (4.7%) Q402E NE NA 54.8%) 53.9%) 62.1% 7.3% CCRT Yr/Yr Growth MSDW/Discover 65.5% 2.2% (1.2%) 9.7% 11.42 (Relative to Charge-offs + Delinquencies) Loan Loss Provision Quarterly Q201A 84.6%) 67.1% 52.9% 62.3% 49.6% 3.1% 62.4%) Company Ticker American Express* AXP Yr/Yr Growth Capital One Financial COF Yr/Yr Growth Citigroup C Yr/Yr Growth CompuCredit 49.0% 53.1% 26.8% 22.7% MBNA KRB Yr/Yr Growth Financial Services/Specialty Finance Metris MXT Yr/Yr Growth Providian PVN Yr/Yr Growth Source: Company data and Wachovia Securities estimates *Cardmember Lending Only .6% 64.7% 53.5% (4.0% (0.8% 73.6%) 46.2% 75.4% 75.0% NE NA Q301A Q401E Q102E Q202E NE NA 53.8% 42.3%) 83.5% 69.3% 43.0%) 66.5% 31.0% 49.3% 53.7% 30.9% 75.0% (2.7% (2.5%) 62.3% 75.1% (1.6% (26.5% 127.2%) 60.9%) 56.1% 52.1% 52.0% 11.8% (4.5%) 63.6% 5.1% 56.3% (25.6% 3.4% (6.8% 9.1% 6.8% (2.7% (12.7% 4.1%) 37.7% 34.0%) 59.6% (42.0%) 49.6% 48.3% 56.1% 60.1% 2.1%) 73.5%) 50.8% 0.2% 15.6% 2.6% (7.2% 50.7% 52.9%) 46.2%) MWD Yr/Yr Growth 48.8% 14.6% 3.1% NA 16.8% 48.9% 62.6% (31.3% 2.6% 75.6%) 62.2% (0.5% (2.8% (28.3% 21.6% 49.0% (0.7% (2.6% 3.8% 1.9% 56.9% 58.5% 60.5% 4.8% 54.8%) 59.1% 4.6%) 62.3%) Full-Year 1997 73.1% 22.6% 76.3% (5.6% 62.2% 45.6%) 44.0% 10.5% 73.6% 3.2% (5.0% 5.8% (11.2% 10.2% (20.5% (15.3% 77.5% 1.1% 9.5% (41.5% (2.6% 10.9% 8.4% 96.9%) 55.2%) 64.1% 52.6% 0.5% 1.3% 1.0% 1998 1999 2000 2001E 2002E Q101A Quarterly Q302E NE NA 52.3% 75.3%) 89.6% (0.5% 11.2% (15.9% 43.7% (11.4% 50.7% 1.8% 8.6%) 46.7% 7.0% (9.6% 3.5% (4.2% 2.5% NM 37.4%) 73.9% 80.5% 6.8% 15.1% (3.0% 75.1% 47.6% 32.9% 11.6% 45.0% 55.6% (7.7% 44.7%) 41.5% 1.9% 66.4% 2.

8%) $57.7% $50.0%) NE NA $55.8%) $14.36 (6.3%) $24.30 (26.32 (15.4%) $20.3%) $14.78 2.21 (4.13 19.69 (82.43 1.5%) $19.27 (21.70 $21.00 NM $54.34 (9.51 16.3%) $16.6% $18.31 (8.34 31.81 40.63 2.87 14.9%) $54.59 (9.4% $59.6%) $61.00 (9.02 (1.4% $39.89 (2.96 15.63 AXP Yr/Yr Growth Capital One Financial $20.25 28.2%) NE NA $55.88 (74.0%) $14.1% $55.4% $54.9%) $14.7% $36.00 NM $53.5%) $15.92 15.9%) $14.7% $0.7%) $51.00 NM Full Year 1997 $27.65 (2.81 COF Yr/Yr Growth Citigroup NA $11.6% $19.47 (10.79 60.8%) $15.11 (2.9%) $96.19 (8.30 3.80 6.43 (5.23 15.20 (25.6% $35.26 NA C Credit Cards 101 Yr/Yr Growth CompuCredit CCRT Yr/Yr Growth Discover (MSDW) MWD Yr/Yr Growth Metris MXT Yr/Yr Growth Providian PVN Yr/Yr Growth Source: Company data and Wachovia Securities estimates *MBNA omitted due to lack of account statistics **Significantly lower than revenue per acct due to high expenses 43 .45 7.10 (63.09 $18.11 (11.7% $17.27 (37.65 7.43 0.42 (25.17 (55.(Net Income Per Average Account) Profitablity Per Account Quarterly Q201A Q102E $27.5% $235.62 (7.6% $48.33 (44.9% $53.81 4.4% $15.2% $0.55 (60.59 (4.3%) $0.5%) $17.5% $47.00 NM $38.76 1.6%) $19.66 (63.51 3.2%) $16.12 $54.2% $13.3%) $61.0%) $174.8%) $55.28 13.9%) Q301A Q401E Q202E $24.20 (12.3%) $60.35 3.33 (33.7% $52.10 (7.04 (61.3% 1998 1999 2000 2001E 2002E Q101A Quarterly Q302E $20.29 (0.05 29.68 2.95 (7.15 (46.3%) $57.4% $15.2%) $16.60 $31.76 59.66 8.00 NM Q402E $31.92 (61.20 10.35 (6.1% $0.58 (60.2% $19.00 NM Company Ticker American Express** $18.6%) NE NA $52.4%) $20.38 8.2%) $15.2%) $38.63 (15.8%) $17.9%) $21.6% NE NA $16.28 2.9% $23.0%) $16.8%) NE NA $56.2% $17.2%) $15.08 5.94 (29.49 1.0%) $13.2%) $14.8% $34.8% $0.8% $9.81 (48.8% $60.4% $58.86 12.5%) $39.1%) $24.6% $21.20 11.7% $28.0% $0.2%) $26.1%) $16.03 (64.32 (9.

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Financial Services/Specialty Finance Appendix B 46 .

47 .Credit Cards 101 The following pages contain previously published company notes.

: Shares Out. • During the conference call.14 and $1. a product of both volume and fee base.: S&P 500: Div. Rate: CY 2001 Est.14 25.25.45 and $2.75 16.231.8% LT Debt: (MM) LT Debt/Total Cap.38 0.75 16. Accordingly. 2001 Rating: Price: 52-Wk. 48 .005. we lowered our 2001 and 2002 estimates to $1. $700 million in cost savings has been realized and 6.59 $0.0 MM 2002 Rev.54 in Q3 2000 and toward the low end of the range of analysts’ estimates.4 Company Continues To Struggle During Economic Softness Earnings Estimates Revised Down EPS FY (Dec.0% 14% 12% 2x Key Points • American Express reported Q3 2001 results of $0.381.22 0.0 6. $5.) Full FY FY P/E Full CY CY P/E 2000 A $0. we concur that the company’s expenses are simply too high.286.) Q4 (Dec.75 from $1.: (MM) American Express Company (AXP-NYSE) Earnings Estimates Revised Down 3 $29. NE 1.38 $1. and international banking services throughout the world.32/0. However.0 5.100 jobs have been eliminated.0 $21.0 39. was down almost 5% from Q3 2000.13 0.785.) Q1 (Mar.40 0. Est.824. Grth.: (MM) Market Cap. The company stated that during the first nine months of the year.14 25. P/E-to-Grth.45 0. • We continue to believe that American Express remains an expense-reduction story.07 14.0 MM Source: Company data and Wachovia Securities estimates Target Price: Float: (MM) Avg.22 per share versus $0. management stated that it expects a weak economic environment into 2002 and that spending during October was running in the negative double-digit area. the TRS division.6x E A A A 2002 E $0.0 5.7x 2001 Rev. which represents the bulk of the company’s earnings.859.48 0.668.6x $1.50 $2. however. Rng.478. $5.07 14.1x 2001 $0.) Q2 (June) Q3 (Sep.440 1.0 $23. • We certainly appreciate that American Express has a "higher-end" customer that requires higher levels of service.910.0 6. has an efficiency ratio of 59% (52% exclusive of marketing).009.0 29.49 $1.344.727. by far the highest in the credit card industry. Daily Vol.0 MM 5.0 MM 4.1x $2. inclusive of these strides. respectively.Financial Services/Specialty Finance October 22. • The company’s quarterly results were driven largely by a significant drop in corporate spending and a material decline in the company’s discount rate. Discount revenue.54 0.0 5. founded in 1850.589.7x $1. financial advisory services. provides travel-related services.081.54 0.43 0.: ROE: 3-5 Yr.877./Yield: Company Description American Express Company.: $4.19 $61-24 1.

to 42.S.30.22.9 million from 50. versus $0. the company grew total cards in force 9%.Credit Cards 101 Q3 2001 Results American Express reported Q3 earnings per share of $0.54 in Q3 2000.14 and $1. Travel Related Services Revenue in Q3 from TRS was $4. resulting in a 12% decrease. charge card receivables decreased to $24. Account Growth During Q3 2001. from $28. American Express generates lower margin from its convenience card users. along with a $540 million pretax restructuring charge and one-time expenses were significant factors behind the quarter’s weakness.4 billion during the same period in Q3 2000. Because the business model is so highly leveraged to strong spending trends. we expect margin to continue to erode.3 billion. 49 .1 billion in Q3 2000. Managed Receivables Total managed receivables during Q3 for U. These results were $0. from 39. average fee per card declined to $34 in Q3 2001. During the conference call. These two statistics personify the shift in business that the company has undertaken. The company cited a substantial decrease in corporate travel.3 million in Q3 2001. to $1. Once again. 2% higher from $4. compared to $27.041 in Q3 2000. up 33% from $623 million in Q3 2000. to 54. respectively. and accordingly. falling 6% from $36 in Q3 2000. The combination of slowing business and consumer spending.25. Basic cards grew 8%. gains in net interest income were largely due to lower cost of funds. a 15% increase. lending was $31.8 billion in Q3 2001. as well as $195 million in restructuring charges and $87 million in expense related to the attack of September 11. entertainment spending. The company reported this was mainly the result of an increased number of cards in force. While net card fees rose 1%. The company is evolving from a highmargin charge card business to a lower-margin credit card model.846 in Q3 2001. Net Interest Income Third-quarter net finance charge revenue was $829 million.4 million in Q3 2000.1 billion in Q3 2000.08 below the consensus estimate of $0.2 million compared to the same period in 2000. As American Express continues to grow its cards in force. However.75 from $1.5 billion.45 and $2. Non-Interest Income American Express’ shift toward a lending model affects the TRS’s fee income most directly. but offset by a shift to lower and no fee products. Within the TRS unit was total spending per basic card falling 10%. and consumer travel since September 11 as a major factor. we have lowered our estimates for 2001 and 2002 to $1. from $2. we believe the vast majority of these new cardholders are convenience users and do not hold the traditional cachet of the American Express cardholder. both corporate and consumer. management stated it expects a weak economic environment into 2003. to $424 million in Q3 2001 from $420 million in Q3 2000. This represents the third straight quarter of decelerating year-over-year growth in revenue at the company’s flagship unit.

Financial Services/Specialty Finance 50 .

in an effort to revitalize the business.5 billion in Q3 2000.50% 6. Along with rising losses. American Express’ master trust data for Q3 shows continued poor performance in losses and delinquencies year over year. American Express cited a weaker economy and some short-term impact on customers from the attacks of September 11. these write-downs and expenses have totaled $1. for example. Credit Quality U.3% during the same period in 2000. Delinquencies averaged a 7.14% 3. to 3. a 3-bp drop. American Express wrote down $185 million related to bad investments in its high-yield portfolio.4%. Lowered billed business and a lower discount rate were the primary reasons for the decline.70% Delinquencies 3. Profitability Analysis Return On Average Assets And Average Equity The Q3 return on average assets for TRS was 2. versus the traditional American Express cardholder buying luxury goods at a highend retailer. loss reserves also rose.0% in Q3 2000.7% in Q3 2000.17% 7.44% 16.0 billion in Q3 2000.99% 11.Credit Cards 101 Discount revenue for Q3 was $1. down 560 bps from 32.S. American Express took a $352 million restructuring charge.5 billion. The company cited lower management fees due to market depreciation during the period.6%.30% Yr/Yr change 7. In total.8%. the company took a write-down of $826 million to restructure its investment portfolio and write down additional high-yield investments. buying toilet paper at Costco. the year-over-year change in losses averaged 14. The average discount rate fell to 2.92% Yr/Yr change 14. as well as a $98 million one-time expense as a result of the attacks of September 11. just slightly below the annualized change in Q2 of 15. from $1. American Express Financial Advisors Revenue was down 10% during Q3 at AEFA. to $1.46% 7. Reserves as a percentage of total loans rose to 3. a decrease of 5%. fee income will continue to decline. Loss July August September 6.84% Source: Bloomberg and Moody’s Research During Q3 2001. up 130 bps from 4.17% 3.6% in Q3 2000. A growing share of the cardholders use their American Express cards for convenience. As this shift continues.4 billion.2% from 2. lower 51 . lending Q3 managed net charge-offs were 5. even with year-over-year increases during Q2. In Q1 2001.61% 5.6%. Write-Downs And Restructuring Charges American Express has taken the following write-downs and one-time charges in 2001. Total managed delinquencies in Q3 rose 60 bps. Return on average equity was 27% in Q3 2001. a 60-bp increase from 2.67% in Q3.5% year-over-year increase in Q3.70% in Q3 2000. In Q3. versus 2.3% in Q3.9 billion compared to $2. down 40 bps from 3. In Q2 2001.6% in Q3 2000.

to $11.S. and its inability to access this distribution network has been a competitive disadvantage. banks. we believe overall returns will come down. spread revenue has grown to 16% from 12% of net TRS revenue. as well as Visa and MasterCard. American Express currently trades at 14x next year’s earnings. Because the market is already saturated for its traditional charge card. Accordingly. We have highlighted the impact this transition will have on returns in the following graph. 52 . it has the second-lowest return on equity in the group. American Express’ lending portfolio would take on an increasingly important role. Accordingly.Financial Services/Specialty Finance spreads on investment portfolio products due to the portfolio repositioning. American Express has argued that roughly 50% of new card originations occur at a bank branch. compared to 8% and flat growth in 1999 and 1998. with CompuCredit being the lowest.4 billion from $17 billion in Q3 2000. Currently.9 billion in Q3 2000. a greater percentage of earnings should come from the credit card product. largely due to its emphasis on highly profitable accounts.3 billion from $11. The growth in this revenue item is a reflection of American Express’ enhanced focus on the credit card market. We believe spread revenue will continue to grow as a percentage of net revenue. banks will no longer be barred from issuing cards other than Visa or MasterCard. and institutional sales were down 75%. As focus shifts to the credit card. Federal Court Rules Against Visa And MasterCard Associations Impact On American Express Given that U. and as a result. companies such as American Express and Discover will have an entirely new distribution channel available. to $234 billion in Q3 2001. giving the company an equal footing. The ruling will allow banks to issue American Express cards. American Express worked toward expanding its product offering to offer not only the basic charge card. Most notable was that mutual fund sales were down 37%.S. of its peers. However. American Express has traditionally enjoyed a higher margin than its monoline credit card peers. respectively. but also an array of revolving card products. However. Asset values continued to move with the equity markets as asset values at AEFA decreased 20%. from $294 billion in Q3 2000. The Effort To Build Spread Business Throughout the 1990s.S. From 1996 to 2000. a shift to a lending model could mean lower profitability and lower multiples for the stock. total global cards grew at an annual rate of 12%. to $488 million in Q3 from $1. card growth has accelerated. The company attributed the decrease to overall depreciation in the U. Along with lower profitability comes margin compression. Weak equity markets have hurt AEFA for the third straight quarter. the highest of its peers excluding MBNA. the company could potentially expand both its market penetrations and its receivable base. Once given access to the domestic bankcard market. equity markets. something the company has been pushing to do in order to capture more spread revenue. as cash sales decreased 33% in Q3. and weak mutual fund sales as factors behind the decrease in revenue.7 billion. given the lower margin inherent in spreads versus fees. American Express has more than 70 partners in 77 countries where these bylaws were unenforceable. to $7. In 2000. which should only increase as the company issues more cards through U. American Express had to look to other sources to continue to grow accounts.

S. Accordingly.S.0% 22. we believe. Merchant Coverage U. the company has reported average discount rates declining.2% 25. the positive impact from account growth and receivable growth.7% 22. citing “everyday spending” as the cause. American Express’ original value proposition of higher-margin. larger-spending customers should deteriorate further as American Express bank cards are brought to market. could potentially be offset by a negative impact on discount rates. Merchant Coverage By Industry All Industries Traditional T&E Oil Retail Supermarkets Merchant Coverage in Markets Outside the U. as well.Credit Cards 101 Growing Percentage Of Spread Revenues Should Lower Returns 16% 14% 12% 10% 8% 6% 4% 2% 0% 1996 1997 1998 1999 2000 ROE 2001E 16.0% 25. In the past few quarters. Source: Company Data % of Charge Volume 1992 74% 98% 69% 69% <1% N/A 1995 87% 98% 93% 86% 25% 73% 1999 95% 99% 98% 94% 79% 86% 53 .0% 22.8% Spread as % of Total Net Revenues Source: Company data and Wachovia Securities estimates Discount Fee Implications However.

To achieve reasonable growth through bank channels. American Express will have to expand its customer demographic. It is unclear how this new model will succeed in the extremely competitive credit card industry. This is why we believe the company is now focusing more on the lending business. With little certainty regarding the economy. Accordingly. Second. In the past. However. arguing that its customers charge more per visit and purchase higher-margin items. the recession has resulted in a slowdown in corporate spending. it appears that the company has begun efforts to control its expenses. resulting in a decrease in fees that American Express charges. History has proven this argument valid. diminishing American Express’ historical value proposition of higher spending and buying highermargin goods. Summary American Express is facing pressure from many different sources. Merchants will demand lower rates to adjust to the lower spending. we believe it is possible that adding incremental accounts through bank channels will lower discount fees further. as well as earnings visibility at the company. 54 . It is in the midst of shifting its business model from a high-margin charge card business to a lower-margin lending business. but the process has been anything but easy. This should result in acquiring customers that charge less and purchase lower-margin items. The attacks of September 11 threw the company another batch of one-time charges with which to contend. American Express has been able to charge merchants the highest discount fees.Financial Services/Specialty Finance While we think this victory for the Department of Justice will have favorable implications for American Express’ growth. average spending per account will decrease. American Express has targeted the high-end customer. we remain somewhat concerned about the status of discount fees. and travel and expense revenue has all but evaporated for the firm. we maintain our Market Perform rating on the stock. Accordingly. which contribute historically 32% of net revenue and an estimated 29% of net income. Finally.

24 $1. however.01 on a GAAP basis. • Pro forma net charge-offs in Q3 were 14. is a direct marketer of bank credit cards and other ancillary products to a strictly underserved market.79 3.0 MM 125. Rate: CY 2001 Est. it is difficult to gain much confidence in the company’s internal earnings outlook.6%. receivable growth should fall below the originally guided range.54 0.03 6.53 0.31 $1.: Shares Out. management stated that charge-offs would peak in Q1.13 0. Est.6 MM 145.: (MM) Market Cap.8 MM 2002 Rev.03 $0.: (MM) CompuCredit Corporation (CCRT-NASDAQ) Earnings Reported 3 $6.Credit Cards 101 October 30. Previously.0x $1. New guidance provided by the company did not assume a material change in the economy.: S&P 500: Div. Currently.0 NA 14% 10% 0.7 $592.3 149. However. the stock has limited upside.28 0.060.1 MM Source: Company data and Wachovia Securities estimates Target Price: Float: (MM) Avg.2 134. and down from 14.30. Our revised 2001 estimate remains at $1.: $0. P/E-to-Grth.6x Key Points • CompuCredit reported Q3 2001 EPS of $0.30.29 0.0x E A A A 2002 E $0. • With such little conviction in our estimates.27 0. management believes charge-offs will remain in the 15% area through 2002. we believe that even at 5x our 2002 estimate.27 from $0. to account for a lack of earnings predictability in 2002.32 0.6 288.5x 2001 $0. $119.5x $1.32.32 0. with such consistent revisions to guidance.19 $34-6 46. $141.: ROE: 3-5 Yr.0% LT Debt: LT Debt/Total Cap. due to what the company characterizes as a 74% decline in spending from August to September.5 Q3 Results--We Reiterate Our Market Perform Rating On The Shares EPS FY (Dec. we reiterate our Market Perform rating on the shares.48 0.15 5. Rng.4x 2001 Rev.48 per share in Q3 2000.15 5. Daily Vol. management had guided to 30-35% receivable growth. Accordingly.03 6.0 112.4 136. The quarter missed consensus estimates by $0. • The company revised its previous guidance to reflect its more cautious outlook.4x $1.) Q1 (Mar.8 $514. NE 11. • We lowered our Q4 2001 estimate to $0.8% in Q1 2001./Yield: Company Description CompuCredit.15 from $1.00/0.) Q2 (June) Q3 (Sep.79 3. versus $0.02 on a managed basis. We also lowered our 2002 estimate to $1. • We believe the earnings outlook for this company is uncertain at best. 2001 Rating: Price: 52-Wk.) Q4 (Dec.6 155.750 1. • Previously. flat with Q2.) Full FY FY P/E Full CY CY P/E 2000 A $0. Grth. and by $0.27 $1.03. 55 . an Atlanta–based company.

Response rates have increased for lower APR. but 360 bps higher than the same period in 2000. decreasing 50 bps from 22.0% in Q2 and 190 bps from 23. CCRT would need to grow receivables 11%. Managed Receivables Third-quarter total managed receivables were $1.4x Q3 levels to achieve full-year guidance. Credit Quality CompuCredit reported Q3 2001 pro forma net charge-offs of 14. it also purged 182.6% in Q2.20% in Q3 2001. Other credit card fees increased 15% during Q3. Management stated that it expects charge-offs to remain flat at the 14.6%.0% level in Q4 2001 and stay flat in 2002. We assume 2001 full-year charge-offs to fall within management’s projected area of 15%. we expect CCRT to meet its full-year 2001 guidance of all other card income. and 17.24%.32. CompuCredit experienced a decline in net interest margin. non-interest revenue was 9. from $7.8-15. total accounts fell 6%. to $8. we expect the net interest margin to remain flat or down in Q4 2001.4 million in Q2. As a percentage of average receivables.9 million from $20. Since Q3 2000. The company is taking steps to avoid being stuck with too many bad accounts. the lowest level since 14.4% in Q3 2000.80 billion. Highlights of the quarter were ancillary revenue increasing 18%. but would not give specific guidance. before declining to current levels. versus $0. Management stated that there should not be any significant purging in Q4 2001. The Q3 more than 60-day managed delinquency rate was 10. 56 .000 new accounts in Q3. and is purging these accounts in order to achieve this goal. and 210 bps higher than in Q3 2000. from 2. Account Growth And Marketing Spending As the company implemented its plan to purge inactive accounts. to 2. With an improving scenario. With some improving trends in the fee-based business. CompuCredit’s purging of inactive accounts is especially significant in light of Providian woes.51% in Q1 2001.3 million. This was the first quarter of positive sequential growth in ancillary revenue since Q4 2000. Net Interest Income In Q3. making up at least 8% of average loans.Financial Services/Specialty Finance Q3 Results CompuCredit reported Q3 2001 EPS of $0.67 billion in Q2.9%. at 8.69% in Q2. the managed net interest margin fell to 21.000. Non-Interest Income Third-quarter non-interest income was $40.33% in Q3 2000. Two-quarter lagged pro forma net charge-offs were 16. higher fee type products.000 inactive accounts and had normal attrition of 138. up from 8. provided there is no change in the current environment. The shortfall in Q3 2001 makes it unlikely that the company will meet its full-year 2001 goal of 30-35% receivable growth or a year-end balance of $2 billion. a 30-bp increase from 10.3 million in Q2 2001. With the expected continuation in this product shift. two-quarter lagged pro forma net charge-offs spiked to 16.81% in Q4 2000. or 1.8%. 18. management stated that it expects charge-offs to be lower in 2002.3 million in Q2 2001.48 per share in Q3 2000. unchanged from Q2. rising 14% from $35. to $23. Management stated that the 50-bp decline was primarily attributable to product mix. rising 8% from $1. Note that the 8% increase was below internal company guidance of 9-10%.0% in Q2 2001.7 million in Q2.7 million in Q3. Although the company added 183.5%.2 million in Q3. as in the case of Providian. Although the Fed cut interest rates by 75 bps during the quarter. the largest sequential increase since the end of 2000.

8% in Q3 from 14.0 13. we expect risk-adjusted returns to come down slightly.3 62. down from $50. significant voluntary and involuntary attrition have resulted in just a 12% increase in total accounts. the company has added 549.3 in Q2 2001.Credit Cards 101 Year to date. decreasing 4 bps from 16.8 in Q2.0 Q3 2001 $168. we expect the company to come in at the low end of full-year new account guidance of 600.7 during Q3 2000. net income per average account rose 2%. Return on average managed equity fell 30 bps.8 26.2 in Q2.000 in inactive account purges. $170. As a result of 182. 57 . At quarter’s end. 5% higher than $160.7 32. We estimate that Q3 risk-adjusted margin was 16.0 Source: Company data and Wachovia estimates Third-quarter net interest income per average account was $168. 15% higher than $62.2 62. the ending balance per account rose 15% sequentially. down 20 bps from 3. to $834 in Q3 from $727.2 million year over year.7 26. Return On Assets And Equity Third-quarter 2001 return on managed assets and equity fell from Q2 levels. total cash on balance sheet was $37.24% in Q2.000 new accounts. Balance Sheet CompuCredit’s cash position continues to decline.000 accounts. to 2.8 in Q2.0 72. down 9% from $46.7 834. Profitability Risk-Adjusted Margin Risk-adjusted margin was relatively unchanged from Q2.2 727.3 in Q2 to its lowest level since $40.8 13.0 Q2 2001 $160. However. With a projected slowdown in Q4 marketing due to liquidity constraints. Return on average managed assets was 3.20%.7 in Q3 from $26. to $13.9. Per Account Analysis Q3 2000 Net Interest Income Non-interest Income Marketing Net Income Ending Balance per Acct. Non-interest income in Q3 rose to $72 per average account. Third-quarter marketing per new account added was $41.6 million.6% in Q2.4% in Q3.2 million in Q1 2001. to 13.9 million in Q2 and $73. to $26.1% in Q2. With projected declines in interest margin in Q4. However. Marketing spending per average account fell 1%.6 50.1 699.7 in Q3 from $13.000-800.

another 50-bp decline in margin reflective of product mix. The $0. and receivable growth of just 12%.15 decline incorporates a 15% charge-off ratio stable throughout the year.03 decline incorporates a sequential 15-bp increase in charge-offs. 21% margin throughout the year. 58 .Financial Services/Specialty Finance Earnings We have lowered our Q4 2001 estimate to $0.4 million. The $0. Our revised 2001 estimate remains at $1. and virtually flat new and total accounts with Q3.30.30. driving a 10% full-year increase in total accounts.000. to 2. We also lowered our 2002 estimate to $1. We also assumed new account growth of 224.27 from $0.15 from $1.03.

0 67. • On October 25.71 $73-36 221.318.: ROE: 3-5 Yr.0 $6.24 20.889.0 MM 2.4x E A A A 2002 E $0. the company outlined a what-if scenario on a recession’s impact on charge-offs.620.: (MM) Market Cap. $56 181.750 1.51 0.0 MM Source: Company data and Wachovia Securities estimates Target Price: Float: (MM) Avg.50 12.0% 25% 20% 0. 59 . Est.2 5. Grth.70 0.9 Downgrading The Shares. 2001.90 0.147.874.85 0.0 MM 1.65.0 2.8x 2001 Rev.041.96 $3. Virginia./Yield: Company Description Capital One Financial.2 9.50 12. Under such a given scenario.) Q1 (Mar.2% LT Debt: (MM) LT Debt/Total Cap.24 20.: (MM) Capital One Financial Corporation (COF-NYSE) Rating Change 2 $44. the company guided to 20% EPS growth in 2002.50 from $3. 2001 Rating: Price: 52-Wk. COF outlined that its rate of increase in charge-offs is estimated to be over 2x the industry average.0 $10.91 15.4x $2.013. the slope of growth we believe increases the beta/risk profile on the stock.54 0.09 $0. or 16x our revised 2002 estimate.338.0 3. offers a variety of credit card and financial services to customers.91 15. We also lowered our 12-month target price to $56 per share from $70.) Q4 (Dec.11/0. Daily Vol. headquartered in Falls Church.: Shares Out.779.0x 2001 $0.80 $2.75 0.182.100.0 1. • On October 25. $2. we have lowered our 2002 EPS estimate to $3. P/E-to-Grth.61 $2. And Lowering Our Target Price And 2002 Estimates EPS FY (Dec. $1.8x $3.969.506.0 MM 2002 Rev.) Q2 (June) Q3 (Sep.: $5.79 0.58 0. due to seasoning and loan mix issues.) Full FY FY P/E Full CY CY P/E 2000 A $0. Rate: CY 2001 Est.: S&P 500: Div.0 1. Rng.66 0.Credit Cards 101 October 25. Accordingly.685. While such a delta in charge-offs would still place COF charge-offs below industry averages.0x $2.8x Key Points • We downgraded COF to Buy from Strong Buy after attending the company’s analyst meeting.

unsecured lending. HI currently trades at 12x 2002 consensus estimates. COF outlined that its rate of increase in charge-offs is estimated to be more than 2x the industry average. due to seasoning and loan mix issues.50.and second-mortgage products. The company also stated that a reasonable amount of future growth is expected to come from adjacent products such as auto. we believe “what-if scenarios” are prudent. Under an 8% unemployment scenario. While such a delta in charge-offs would still place COF charge-offs below industry averages.Financial Services/Specialty Finance Discussion We downgraded the shares of Capital One to Buy from Strong Buy and lowered our target price to $56 from $70. we believe Household will become a more relevant comparable. Because a good portion of Capital One’s portfolio is less than 12 months old and there is limited vintage data available. charge-offs could increase 90%. compared to 50% year-over-year industry increases. and first. or 16x our revised 2002 estimate of $3. not a business model currently extant at Household International. Capital One’s charge-offs could increase 72%. the company outlined a what-if scenario on a recession’s impact on charge-offs. On its conference call of October 25. In a 6% unemployment scenario. Under such a given scenario. the slope of growth we believe increases the beta/risk profile on the stock. 60 . Accordingly. This could be unsettling for some investors.

971. We reiterate our Strong Buy rating on the shares of Capital One.91 14.0 $6. 2001 Rating: Price: 52-Wk. While management reiterated its target of 30% EPS growth for 2001. we believe such guidance. $2. Our 2002 EPS estimate of $3. Est. to be provided after the close October 24. it resisted providing guidance for 2002. will provide the near-term catalyst for the stock.8 Q3 Earnings On Target.65 11.61 $2.0 MM 1. and in line with expectations.75 0.2 9.66 0.) Full FY FY P/E Full CY CY P/E 2000 A $0.6x Key Points • • • Capital One reported Q3 2001 results of $0.: (MM) Capital One Financial Corporation (COF-NYSE) Earnings Reported 1 $42.0 MM Source: Company data and Wachovia Securities estimates Target Price: Float: (MM) Avg.65 11.86 0.) Q1 (Mar.24 19.70 0.99 $3. P/E-to-Grth. Daily Vol.: (MM) Market Cap. As this is the big question currently on investors’ minds.65 remains a midpoint of the expected range of guidance to be provided next week. strong margin. Suffice it to say that the range will be 20-30%.7x $3. headquartered in Falls Church.58 in Q3 2000. 19x our 2002 estimate.922.091.51 0.7x $2. versus $0.11/0.0 2.88 0.24 19.0 MM 2002 Rev. we believe Capital One stock.2% LT Debt: (MM) LT Debt/Total Cap.482. is extremely compelling.506.620.0 $9.54 0.12 $0.0 2.193.: S&P 500: Div.1x $2.91 0.0 1. $70 181.245.: $5. Grth. and stellar credit quality produced the robust Q3 results.91 14. Rng.75.: Shares Out.Credit Cards 101 October 16.: ROE: 3-5 Yr.509.0% 25% 25% 0. We Reiterate Our Strong Buy Rating On The Shares EPS FY (Dec.7x E A A A 2002 E $0. Our target price remains $70 per share.58 0.1x 2001 $0.036.850 1.91. $1.80 $2.808.) Q4 (Dec.041./Yield: Company Description Capital One Financial. As this EPS target dwarfs much of the rest of the growth in other sectors.2 2.0 MM 2. offers a variety of credit card and financial services to customers. Our 2001 EPS estimate remains $2. Rate: CY 2001 Est.7x 2001 Rev. Strong receivable growth. We simply do not know management’s inclination on guidance.0 67. • • 61 .0 2.322. at roughly 12x (the low end of such guidance).) Q2 (June) Q3 (Sep. Virginia.269.87 $73-36 221.

it is more appropriate to judge delinquency trends on a year-over-year basis. At the end of Q3. The company emphasizes originating loans directly to the customer through virtually any motor vehicle dealer. We expect such trends to continue. Privately held. as well as stellar credit quality. Revenue per account expanded during Q3. PeopleFirst is the nation’s largest online auto lender.98%. the average balance per account totaled $959. However. given that industry average charge-offs are currently roughly 6%. but on a year-over-year basis delinquencies were actually down. totaling more than 40 million at the end of the quarter. This marks the company’s second acquisition of an auto lender. a division of Household international. management stated during the conference call that it expected charge-offs and delinquencies to move higher over the next 12 months.15 billion to its partners.7 million shares or $158. Receivable growth of 59% allowed the company to end the quarter at $38 billion. According to Capital One. up 38% annually and 7% sequentially. our estimates assume an annual charge-off rate of 5% for 2002. PeopleFirst Inc. a 25% increase in losses year to year. Due to seasonality. to 5. 62 . we believe our charge-off estimate going into 2002 is conservative. and up slightly from year-ago levels. California. as the company gains a greater share of revenue from revolving balances. in our view. though only slightly. versus $0. Accounts grew 36%. charge-offs as a percentage of average managed receivables totaled 3.80.92%. as the company focuses more on growing balances in superprime and less on growing the number of accounts.2% from 4. Capital One Acquires PeopleFirst During Q3 Capital One announced it had agreed to acquire privately held PeopleFirst for 3. a segment the company did not previously participate in due to difficult economics. PeopleFirst will become a wholly owned subsidiary of Capital One and after the deal’s completion. as the company earned spread income on higher average balances per account. based on a recent average closing price of $42.3 million. and in line with expectations.75 per share. Non-interest income grew to $853 million. Of the 1. Credit quality ratios remain at best in industry levels. down sequentially from 3. the current senior team at PeopleFirst should continue to manage its operations. For the quarter.58 per share in Q3 2000. As Visa is currently estimating just a 17% increase in bankruptcies. up 17% annually and 4% sequentially. Accordingly.9 billion in loans originated since 1997. PeopleFirst either securitizes the loans it originates or sells them as whole loans to partners such as Household Auto Finance. Management stated that non-interest income as a percentage of net revenue should decline from Q3 levels of 48%. This is remarkable. the company was founded in 1995 and currently has 270 employees based in San Diego. the first being the 1998 acquisition of Summit Acceptance Corporation. the company has securitized $750 million and has sold the remaining $1.9% in Q2. focusing on providing low rate loans for new and used cars. PeopleFirst should provide Capital One an entry into the superprime auto loan market.Financial Services/Specialty Finance Q3 2001 Results Capital One reported Q3 results of $0. as well as motorcycles mainly through the Internet. The quarter reflected extremely strong receivable growth and margin expansion. Delinquency trends ticked up sequentially.

S.8 billion in securitized auto loans. and superprime. bringing total managed receivables to $36 billion. based on Q2 statistics.09% on the company’s 1999-A public master Trust. The acquisition should give Capital One a full spectrum across all markets in auto lending: subprime. The company believes that diversification is also a plus.com. the auto finance and non-U.com. Charge-offs at WFS Financial were 3. The auto finance market is a highly fragmented. PeopleFirst could be an enormous improvement in credit quality for Capital One.71% on their Summit 1998 A public trust. scheduled for mid-October. Portfolio Growth As previously mentioned. Capital One intends to increase its managed receivable by $750 million. card business is growing faster than the domestic card business. Capital One has expressed to us that its strategy is to seek the most highly profitable opportunities. From conversations with other auto finance companies. 63 . Charge-offs on the company’s 1999 public master trust (the oldest available) were 3 bps. it appears that Capital One paid a premium for PeopleFirst’s business. E-Trade Bank. and the National Automobile Dealers Association.7 million shares of company stock to the owners of PeopleFirst at the closing price of the day the deal is complete. Chase had charge-offs of 91 bps on its 1998 public master trust. Mail Boxes Etc. For comparison. Autoweb. versus relying solely on a dealership network to originate loans that can possibly lead to adverse selection. which is considered prime and superprime. regardless of sector. Cost The acquisition cost roughly 21% of the loan portfolio based on $158 million purchase price relative to $750 million in managed loans. net-interest margin is razor thin--possibly just 2-3%. Lending Tree. Credit Quality The superprime business of PeopleFirst should improve the credit quality of Capital One’s auto finance portfolio. This is to be expected.. Because PeopleFirst is a superprime lender. Capital One appears to be growing its managed portfolio in a more cost-effective method than some of its competitors that have been willing to pay high premiums for credit card portfolios. Charge-offs at Capital One were 11. this is Capital One’s second auto finance acquisition.Credit Cards 101 PeopleFirst has strategic partnerships with American Express. prime. relatively unsaturated avenue through which Capital One can explore and possibly enjoy high loan growth. The company appears to be growing its lending portfolio through organic growth in its credit card business and acquisitions in alternative consumer lending markets such as auto finance and medical loans (such as its recent acquisition of Amerifee Corporation). Edmunds. According to the company.com. Kelley Blue Book. Capital One plans to continue offering auto loans directly to the customer because this offers better credit quality by allowing the company to more accurately evaluate the applicant’s credit risk. Impact On Capital One Capital One has agreed to pay 3. adding to its $1. we looked at other issuers with public master trust data of similar vintage. WFS is considered near prime. which was predominantly subprime. as it is well known that competition and pricing for card portfolios are extremely high.

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002.33 13.0 47. • The company has a clear advantage as the liquidity leader of its peers and is actually in a position of excess liquidity.068.36/1.: ROE: 3-5 Yr. insurance.4% 19% 25% 0.0 MM 2.: (MM) MBNA Corporation (KRB-NYSE) Company Note 1 $31./Yield: Company Description MBNA Corporation.0 27. P/E-to-Grth.54 0.34 0. We expect MBNA’s charge-offs to remain close to 5% over the next couple of quarters. November 9.) Q2 (June) Q3 (Sep. MBNA has delivered in excess of 20% growth in earnings per share. is a bank holding company for MBNA America Bank. clearly outperforming industry-average charge-offs. • Currently.) Full FY FY P/E Full CY CY P/E 2000 A $0. • Management stressed consistency in earnings.0 2. Rate: CY 2001 Est.0 MM 2002 Rev. 2001 Rating: Price: 52-Wk. We Reiterate Our Strong Buy Rating Management Stresses Consistency In Earnings Per Share EPS FY (Dec. Est.) Q1 (Mar.919.43 0.121.3x E A A A 2002 E $0. 19x our 2002 estimate.5x 2001 $0.25 billion in asset-backed security sales.35 0.871. and deposit products focused on the affinity market. $46 647.: S&P 500: Div. Grth.3x $1.5x $1.0 MM Source: Company data and Wachovia Securities estimates Target Price: Float: (MM) Avg.451. Over the past 43 quarters.43 0.5x $2. $2.64 0.566.43 0.090. MBNA also offers credit cards.28 0. headquartered in Wilmington.Financial Services/Specialty Finance November 09.61 $1. $3.33 13. Through the bank.5x 2001 Rev. consumer loans. • While notable peers have stumbled and the market appears saturated.31 $0. • MBNA’s credit quality should continue to outperform industry averages. We remain confident in MBNA’s ability to deliver 20% growth in earnings per share in 2002.120.0 Wachovia Hosts Meeting With MBNA.0 $11. we believe MBNA will prevail as a dominant market share leader. We believe such a liquidity premium should translate into a premium multiple in the company’s stock valuation.54 20.) Q4 (Dec.48 $1. Accordingly.845.1% LT Debt: (MM) LT Debt/Total Cap. Rng.0 3. the company has executed roughly $3.000 1. MBNA has a significant pricing advantage over its monoline peers within the assetbacked securities market.: (MM) Market Cap.0 3.7x Key Points • We hosted an investor day with MBNA on Friday.0 MM 3. Daily Vol.657.290. Delaware.0 3.50 $40-23 878. 66 . Since September 11.: Shares Out.93 16.258.54 20.0 3.: $6.53 0. 2001. we reiterate our Strong Buy rating on the shares and $46 target price. which are well in excess of 6%.93 16. due to its scale and strong liquidity advantage over the competition.0 $12. at which the company addressed its extremely optimistic outlook for 2002.72 $2.510.

It has never relied on fee-based products and has stayed away from the “underserved” market. 2001. Because the company has achieved this lowest cost of funds advantage. Liquidity MBNA continues to be the leader among the card issuers in the area of liquidity. its margin can continue to widen through Q4. This approach has positioned the company as the leading monoline issuer. the colleges and universities are no longer getting these signing bonuses and they are displeased with the poor service they received. Direct Mail Addressing concerns regarding the current state of direct mail.Credit Cards 101 Discussion We hosted an investor day at MBNA on November 9. as these contracts expire. However. stating it already sent 70 million pieces in October and mailing to remain above average in November and December. However. MBNA has designed a new foldover solicitation with an 800 number on the outside. As a result. Management shared with us that several years ago intense competition existed in the college and university market among credit card issuers. As of Q2 2001.5 billion. in light of Providian’s difficulties. As a result of its success in the affinity and financial institutions business. Management stated that this deal was upsized to $1 billion from $750 million. the company expects to grow accounts by 9-10 million this year. Affinity Program MBNA continues to expand its hallmark affinity business.5%. the demand for MBNA’s securities at the time of the issuance was in fact as strong as $2.5 billion. at which the company addressed its extremely optimistic outlook for 2002. and MBNA currently has a retail deposit base of $18. The company has 85% of its securitized loans rated AAA. Currently. amounting to about 650 relationships. MBNA characterizes itself as a lending company. The company stated that it believes the driver behind its present and future success lies in its simplicity. Retail deposits are another source of funds the company can access. MBNA is now going after these colleges and universities that have fallen by the wayside and is signing them. A full 80% of its gross revenue comes from interest income. The company stated that it will continue to send direct mail into December 2001. combined with 95% of its portfolio being fixed. MBNA was the fifth-largest mailer. After the attacks of September 11. the company has affinity relationships with 50% of the total college and university market.5 billion loan portfolio from such relationships. The company has also had success with its professional affinity programs. 67 . MBNA stays committed to this strategy by competing for and winning the largest college and university relationships. 500 bps above the required 10%. MBNA currently has a $12. MBNA may be capitalizing on this opportunity and could move up in the rankings. with A and BBB ratings accounting for only 7. Actually. This strategy was created to mitigate current fears regarding opening mail. sending 89 million solicitations. delivering consistent growth in earnings and receivables while keeping charge-offs below industry levels. the company came to market only nine days later and completed a three-year $1 billion securitization. MBNA maintains a 15% risk-based capital ratio. the asset-backed market has rewarded the company with the lowest cost of funds relative to its credit card peers. Some competitors signed contracts giving the college or university $5-8 million up front. respectively.

54 per share versus $0.290. • Organic receivable growth of 9% was consistent with the company’s organic receivable growth one year ago.0 3.: ROE: 3-5 Yr.01 better than Street consensus.33 for 2001 and 2002. resulting in one of the highest risk-adjusted margin quarters in recent history.2x $1.) Q4 (Dec. insurance.4% 19% 25% 0. Through the bank.28 0.61 $1. $2.43 0. and deposit products focused on the affinity market. $3. • Credit quality remained extremely stable for this low beta company. Rng. • Consumer spending was extremely strong during Q3 2001.0 MM Source: Company data and First Union Securities.43 per share last year. up 14% from year-ago levels.0 2.34 0.090.90%. Consumer spending per average account was $5.: (MM) MBNA Corporation (KRB-NYSE) Company Note 1 $31. • Strong margin expansion more than offset rising charge-offs.: (MM) Market Cap. remarkable given the slowdown in consumer spending after the attack of September 11. MBNA also offers credit cards.2x 2001 E $0.0 $12./Yield: Company Description MBNA Corporation.: S&P 500: Div. 2001 Rating: Price: 52-Wk.93 16.770 1.64 0. Consumer spending totaled $36 billion.53 0.359.0 MM 2.43 A 0.43 $0. • We reiterate our Strong Buy rating on the shares of MBNA with a $46 target price per share.: $6.93 and $2.1x 2002 E $0.0 MM 3. fees increased to $1 billion.54 20. Inc.871.1% LT Debt: (MM) LT Debt/Total Cap.566. resulting in total managed loans of $92. 19x our 2002 estimate. consumer loans.07 $40-23 878.) Full FY FY P/E Full CY CY P/E 2000 A $0.1x $1. 2% higher than 2000 levels of $5.3x 2001 Rev.919. Risk-adjusted margin for Q3 was 8.0 27. and flat from Q2 levels.893.72 $2.57%.002.500.) Q2 (June) Q3 (Sep.510. P/E-to-Grth.33 13.54 20.54 0.) Q1 (Mar.0 2.755. headquartered in Wilmington. estimates Target Price: Float: (MM) Avg. The net interest margin increased to 8.097.6x Key Points • MBNA reported Q3 2001 results of $0.36/1.35 A 0.: Shares Out. respectively.068. 68 .6 billion at the end of Q3. Our EPS estimates remain $1. Charge-offs and delinquencies remained well below industry averages.0 3. Delaware.0 MM 2002 Rev.48 $1.7%. is a bank holding company for MBNA America Bank.845. Grth.5 Stellar Q3 Results MBNA Remains A Top Sector Pick EPS FY (Dec. Est. $46 647.93 16.279. Daily Vol. and net charge-offs were 4.0 $10. Rate: CY 2001 Est.3x $2. in line with our estimate and $0.Financial Services/Specialty Finance October 11.43 0.33 13.0 47.400.0 3.

23% in Q3 2001. The quarter was highlighted by robust cardholder spending and continued strength in net interest margin.6 billion.54 versus $0. in line with our expectations and $0. Delinquencies were 4.9 billion in sales and cash advance volume in Q3.1 million accounts and 329 new affinity groups.2 billion from Q2 2001. compared to $31. and up 9. an increase of 14% year over year. rising 16% from $864 million in Q2 2001. During the first nine months of 2001. However. non-interest income also posted solid gains.85% and 4. Credit Quality Third-quarter managed net charge-offs were 4.6 billion. The company expects delinquencies to return to normal levels seen in the past few months in Q4. Management commented that charge-offs should stabilize at Q3 levels. Sequentially.3% year over year. The company continued to grow its portfolio despite the difficult economic and industry specific conditions in Q3.4 billion in Q3 2000. up 147 bps from 7. Managed Receivables Managed receivables at quarter’s end were $92. MBNA cardholder spending remained strong in the quarter. Interest Margin Third-quarter managed net interest margin was 8. which was consistent with overall consumer spending trends.82%.65% in Q3 2000 and 34 bps lower than 4. However. delinquencies would have been between 4.500. from $84.43 in Q3 2000.33% in Q2 2001. Non-Interest Income Non-interest revenue was strong in Q3. net charge-offs were up 8 bps. from 4. industry average charge-offs remain at roughly 6%. and 24 bps from 8. 42 bps lower than the 4. posting $35. On a sequential basis.88% in Q3 2000. On a per average active account basis. MBNA estimates that without these measures.10% in 2000. The company continues to achieve strong net interest margin largely due to a combination of the Federal Reserve cutting 75 bps during Q3 and 90-95% of its portfolio having fixed finance charges.Credit Cards 101 Q3 2001 Results MBNA reported Q3 earnings per share of $0. up $2. to $1 billion from $774 million in Q3 2000.90%. the company postponed current accounts from becoming delinquent if payment was not punctual. because of the September 11 attacks and the ensuing difficulties for some cardholders in receiving their statements on time. consumer spending has rebounded to pre-September 11 levels.57%. Note. The company stated that spending in the weeks following the September 11 attacks slowed consistent with its own consumer spending habits. cardholders spent $5. in the past few weeks.95%. the company added 7. up 102 bps from 3. rising 29% year over year.57% in Q2 2001.400 in Q3 2000 and flat from Q2 2001. 69 .01 better than the Street consensus. growing 2% from $5.

38% in Q3 2000 and 70 bps higher than the 3. Q3 risk-adjusted margin was 8.93% in Q2 2001. 20 bps higher than 4.49%.74% in Q3 2000 and a 76-bp improvement from 7.58% in Q3.56% in Q3 2000. This was 95 bps higher than the 7. Return on average total equity was 26.69%. but up 420 bps from 22.88% in Q2 2001. 110 bps lower than 27. Return On Average Managed Equity And Assets Return on average total assets was 4.33% in Q2 2001.Financial Services/Specialty Finance Profitability Analysis Risk-Adjusted Margin Assisted by gains in net interest margin. 70 .

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52 $2.78 0.0 736.0 637. as managed receivables grew 29%.353. however.04/0. Minnesota.8x $2.0 billion. Accordingly.57 and $2. we have lowered our 2002 estimate to $3.8 2. to $11.0 MM 712.78 $39-19 99.425. Rng.68 $2.895. 72 .5%./Yield: Company Description Metris Companies.910 1. Our 2001 estimate remains $2. We do note. Rate: CY 2001 Est.4x Key Points • Metris reported Q3 earnings per share of $0.: (MM) Market Cap.52 in Q3 2000 and $0. The company expects net charge-offs to tick up next year.11 10.59. • The company also revised FY2001 guidance upward. that we believe our revised estimate will most likely prove extremely conservative.57 8.) Q1 (Mar.1% LT Debt: (MM) LT Debt/Total Cap.09 $0.71 0.: $451.57 8. Grth. stating to expect between 10% and 11% in Q4.0% 27% 25% 0. • Metris provided guidance for 2002.9x E A A A 2002 E $0. Receivable growth exceeded our expectations. to 10.0 MM Source: Company data and Wachovia Securities estimates Target Price: Float: (MM) Avg. up from previous guidance of $2.9% in Q2 2001.55 0. • We maintain our Buy rating on the shares with a $40 target price per share.9x $2. Louis Park.05 from $3. P/E-to-Grth.2% • Managed net-charge offs improved in Q3 2001. to 14.: ROE: 3-5 Yr. $40 3. Est.70 0.8x 2001 $0.5x $3. stating that earnings per share will be between $2.15.Financial Services/Specialty Finance October 17.52 0.0 MM 2002 Rev.54-2.00 and $3.077.0 659.53 0.05 7.0 2.273. to reflect management’s more conservative outlook.02 better than both our estimates and Street expectations.: Shares Out.75 0.) Full FY FY P/E Full CY CY P/E 2000 A $0. but is expecting the range for 2002 to increase to 10. is an information-based direct marketer of consumer credit products and feebased services. $530.: S&P 500: Div. $681.05 next year.0 $2. Daily Vol. (MXT-NYSE) Earnings Estimates Revised Down 2 $22. 2001 Rating: Price: 52-Wk.57 0.70 versus $0. based in St.0 766.81 $3.0 29.: (MM) Metris Companies Inc.) Q4 (Dec.05 7.7% from 10.4 Q3 2001 Results Beat Expectations Lowering Our 2002 Estimate To Reflect More Conservativism EPS FY (Dec. as well as extended service plans focused on the un-banked market.63 0.5-11.60. Net interest margin improved 10 bps sequentially and 100 bps year over year. 13x our 2002 estimate.57.) Q2 (June) Q3 (Sep.1 2.5x 2001 Rev.11 10. ahead of expectations due to strong receivable growth margin expansion. stating it expects to earn between $3.0 MM 599. • Metris reported strong Q3 2001 results.

000 accounts during the quarter. Account Growth Total accounts in Q3 grew to 4.8 million. Last. Managed Receivables Third-quarter managed receivables grew to $11 billion.52 in Q3 2000.199 in Q3 2000. to 874. Metris has revised FY2001 earnings estimates to between $2.000. Metris stated that it waived $2 million in late fees for its customers in the New York and Washington. it appears as if revenue is slowing. enhanced revenue was only 3. versus $0. The company stated in its press release that it expects enhancement service revenue to grow 25-35% in Q4 2001. 10% lower than the $194 million in Q3 2000. 20% higher than the $452 in Q3 2000. net interest margin rising to 14. The company added 380. Net Interest Income Third-quarter managed net interest margin was 14.2% in the same period in 2000.8 million in Q3 2000.6 million in Q3. a 29% increase from $8. Management also stated that it has agreed to buy another card portfolio with $130 million in receivables. Organic growth was in line with stated goals of 250.0 billion from $8. including 130. On its conference call. carrying an average balance of $2. 26% growth in non-interest income.4 million in Q3 2000. however. 100 bps higher than the 13.2%. However. active members at period end also declined. an increase of 18% from Q3 2000. areas following the events of September 11.02. 22% higher than the $198 million in Q3 2000.0% for Q4.7 million from $131.5 million in Q3 2000.Credit Cards 101 Q3 2001 Results Metris reported Q3 earnings per share of $0. terms were not disclosed. 10% higher than the 4.57 and $2. Although Metris reported a 25% increase in enhanced services revenue. to $86. to 5. management cited the exit of the partially secured credit card business as a factor in the rising average balance amounts. Net interest margin is expected to stay in the range of 13. Provident Bank’s portfolio. to $395 million from $280 million in Q3 2000. another sign that the fee business is slowing is the decrease in deferred revenue.000 new accounts per quarter. Factors contributing to the growth were continued spending by Metris’ cardholders.000 in Q3 2001 from 1. In addition. Non-Interest Income Non-interest income for Q3 2001 was $242 million.C. The company benefited from a lower cost of funds of 5%.54-2. falling 7%.59. Inclusive in the growth was also a small portfolio purchase. As a percentage of average managed loans.5-14.5 billion in Q3 2000. a 240-bp decline from 7. its lowest level since Q4 1999. this does not account for the weakness in non-interest income when viewed relative to average managed loans. The quarter was driven by strong growth in receivables of $2.4% for the same period in 2000. representing 30% growth in operating earnings year over year.0 million in Q3 2000.70. Net interest income rose 41% in Q3. and overall higher net revenue per account of $542. Given that 73 . Results were above both our expectations and Street consensus by $0.2% in the same period in 2000.000 acquired from the Provident Bank acquisition. In Q3. This was a 100-bp increase over 13. from 6. D. deferred revenue was $176 million. to $165.60 from previous guidance of $2. which added $160 million in receivables.300 per account during Q3. achieving 29% year-over-year growth.5-11.2 million in Q3 from $68.24%. Total enrollments are down 325.5 billion in Q3 2000.2%.

Financial Services/Specialty Finance enhanced revenue grew only 25% since last year. 74 . its lowest ever. Metris would have to revive this business in order to achieve anything but the low end of its expected range.

Metris provided guidance for the key drivers in their business.205 Q3 2001 $336.8% for the same period in 2000. 40 bps higher than 2.7 60.33% in Q2 2001.000 per quarter.93% in Q2 2001.2 2. New account growth is expected to be between 200.4 206. Per Account Analysis On An Average Basis Q3 2000 Net Interest Income Non-interest Income Marketing Net Income Ending Balance Per Acct. rising 30 bps from 8. rising 335 bps.1 45.9% in Q2 2001.7%. improving 20 bps from 10. and 6% higher than the $826. The company expects net interest margin to fall within the 75 .1 million in loss allowance in Q2.3 55. and down 14 bps from 13.5% in 2002.944 2002 Guidance For FY2002. and 87 bps higher than the 25. Management stated that fee income is relatively volatile from quarter to quarter and that Q4 fee income should resume to more normalized levels.3 2.0 214. Return on average equity was also higher. stating to expect between 10.0 35.45% in Q3 2000. and 17 bps higher sequentially.2 1. weakness in non-interest income.5%. The company expects net charge-offs in the 10-11% range in Q4.6%.297 $264.Credit Cards 101 Credit Quality Managed net charge-offs in Q3 2001 were 10. Third-quarter managed delinquencies were 8. Management guided its range of net charge-offs slightly higher for 2002.3% in Q3 2000. Return On Average Managed Assets And Average Equity Third-quarter return on average managed assets was 2. from 8. Managed loans are expected to grow 10-15% in 2002 from 2001 levels. Profitability Analysis Risk-adjusted margin on average managed loans was 13.000 and 250.5% and 11. Management stated that new accounts added to the portfolio are generating higher profit than existing accounts and expect this trend to continue.40% in Q2 2001.2% in Q3 2000 and 10 bps higher from Q2 2001.6 34.8 187. a 21% increase from the 2000 allowance of $729.46% in Q3 2000.3 million.25%. Source: Company data Q2 2001 $313. down 21 bps from 13. Although Metris experienced improvements in net interest margin and lower charge-offs than in Q2 2001. but 90 bps higher than 9. The provision for loan losses in Q3 was $879. to 26.5 million.7 46. specifically enhanced fee revenue led to a lower risk-adjusted margin.80% from 23.

25% range and expects fee income to experience 5-10% growth.5%.00 and $3.000 new enrollments per quarter in their enhanced services business and expects revenue to grow 15-20% next year.000-750. Metris expects 700.05 in 2002. 76 . Charge-off rates are expected to be between 10.Financial Services/Specialty Finance 13. As a result. The company expects to earn between $3.5% and 11.75-14. Metris appears to be assuming a U-shaped recovery for late 2002 and feels confident in the company’s prospects for 2002. Management stated that it is extremely conservative in its assumptions for the economic climate in 2002 and wants to meet its stated goals under the most difficult of environments.

0% 9% 15% 0. our FY2001 estimate to $0.0 1.82. • The CEO announced his resignation and will officially step down after an externally sourced replacement is found.658.: S&P 500: Div.00 NM 2001 Rev. and a variety of fee-based products and services.: Shares Out./Yield: Company Description Providian Financial Corp.20 0.0 MM 1.0 5.78 0.61 $0. We have downgraded our rating on the shares of Providian to Underperform from Market Perform.00 0.0 32.0 1.716.79 0. Est. California.684. that the company will put its assets up for sale. NE 277. With an extremely high beta on losses.0 3.73 $2. $1.900.00 $0.4% LT Debt: (MM) LT Debt/Total Cap.737.: (MM) Market Cap. home equity and secured cards. P/E-to-Grth. Grth. Company Likely To Sell Assets EPS FY (Dec. Providian cited efforts to strengthen its balance sheet and worse-thananticipated credit quality as factors in the shortfall.19-0.5x $2. Rate: CY 2001 Est.60 0.68 in Q3 2000.159. $1. significant doubt placed on the company’s underwriting. Rng.901.746.20/0.0 $6.0 1.0 MM 1. • It is likely with this much uncertainty in the future earnings of the company and more important. 77 . headquartered in San Francisco. • We have no confidence in these estimates.25.73 4. • In a prerelease.) Full FY FY P/E Full CY CY P/E 2000 A $0. as well as pressure on net interest and fee income. is a consumer lender that offers a range of lending products.: ROE: 3-5 Yr.5x 2001 $0.0 1.76 7.: $1. Daily Vol.20.) Q2 (June) Q3 (Sep.) Q1 (Mar.20 versus $0.400 1.0x $1.40 $65-12 295.5x Key Points • Providian reported Q3 2001 earnings per share of $0.714.00 from $0.0 $7.737. as they could prove too aggressive.00 0.00 per share from $3. the cost of funds is certain to rise. How strained Providian’s access becomes should be the only salient question to investors.73 4. • We have lowered our estimates for Q4 2001 to $0. including credit cards.0 MM 2002 Rev. • The only relevant issue at this point for the company is funding.765.) Q4 (Dec.00 $1.068.Credit Cards 101 October 18.129.21 per share. and our 2002 estimate to $0.00 from $3..: (MM) Providian Financial Corporation (PVN-NYSE) Rating Downgrade 4 $12.64 0.0 MM Source: Company data and Wachovia Securities estimates Target Price: Float: (MM) Avg.76 7.78 0. 2001 Rating: Price: 52-Wk.807.00 NM $0.0x E A A A 2002 E $0. in line with previously lowered guidance of $0.00 0.0 That's All Folks! CEO Resigns 2002 Profitability Seriously Questioned.

it is finding that losses are growing faster than loans. as well appointing J. despite a complete fall-off in the weeks following the attack of September 11. and exacerbated by the events in the past month. 78 . At that time. 33% higher than $761 million in Q3 2000.90% in Q3 2000. rising to 18. Managed net interest income for Q3 was $1. to $1. Too Little. Average balance per account rose 7% year over year.5 million in Q3 2001 from 15. Q3 2001 Results Managed Receivables Managed receivables grew $1. MBNA and Capital One have both reported that quarterly charge volume has been healthy. Providian announced it was reducing 2001 guidance for loan growth to 2931% from previous guidance of 32-35%. higher-indebted consumer is hit harder than the middle-to-upper income customer with a healthy balance sheet. Too Late On September 4. lower-than-expected fee and finance charge income in September. Providian is caught with a mostly “underserved” portfolio during an economic downturn.94%. a 4-bp increase from 12. Providian has been reporting that its customer spending has softened.5 billion in Q3 2000.68 in Q3 2000. economic slowdown. The company is suffering from its failure to penetrate the superprime segment. Non-Interest Income Third-quarter non-interest income was $702 million.21 per share. and higher-than-expected credit losses in September.Financial Services/Specialty Finance Providian Financial reported Q3 earnings per share of $0. The company cited three primary factors that resulted in the quarter’s weakness--actions taken to strengthen the balance sheet in anticipation of continued weak credit conditions. management stated that the company missed loan-growth targets in the superprime sector by $1 billion.000 net new accounts during Q3.743 in Q3. David Grissom as chairman and beginning a search for a new CEO while Shailesh Mehta stays on temporarily. However.20 versus $0. It is possible a rift has been created between the superprime and subprime market by the U.75%.19-0. the lower-income.8 billion in Q3 2001. Net Interest Income The Q3 managed net interest margin was 12. Providian stated that.3 billion. This has cost the company dearly. a 31% increase compared to $24. net interest margin would have been 13.637 in Q3 2000. the company is repositioning its strategy to focus on its middle-market business. This was largely due to an increase in average balance per account off a greater number of accounts. to $32. It is possible that in periods of layoffs and economic uncertainty.0 billion. which saw the benefits of the superprime market early on. The company added 800.S. Unlike Capital One. and in line with previously lowered guidance of $0. from $1. Stuck in the underserved market. Account Growth Providian grew accounts by 23% since Q3 2000. In efforts to make the best of an extremely difficult situation. 2001. 13% higher than the $620 million in Q3 2000. exclusive of its recognition of uncollectible accrued finance charges.0 million in Q3 2000.

increasing 100% from $497.7 171. Managed return on equity was 9. increasing 188 bps from 10.6 53. This is reflective of the worsening loan quality at the company.2 Net interest per average account increased 6%. due to older vintages being stressed by a macro environment that was worse than expected.2 39. falling 474 bps from 15. managed delinquencies would have risen to 8. Return On Average Managed Asset And Average Equity Third-quarter managed return on average assets was 0.4 55. Source: Company data Q2 2001 $221.62%.Credit Cards 101 Credit Quality Managed net charge-offs for Q3 were 10.89% in Q3 2000.92% in Q3 2000. return on equity experienced an extreme drop in Q3.4 1. Allowance as a percent of on-balance-sheet loans rose to 12.7 1. Per Account Analysis On An Average Basis Q3 2000 Net Interest Income Non-interest Income Marketing Expense Net Income Ending Balance Per Acct. to $155.7.61% in Q3 2000 and 48 bps from 10. risk-adjusted margin fell 264 bps from 13. Cost Per Net New Acct.4 in Q3 2000.6 9.3 million in Q3 2000.6 1.2 Q3 2001 $223.29% sequentially.7 in Q3 2000.0%. a 3% increase from $38.7 38. a 230-bp decrease from 2.5 million.2 184.4%. a 195-bp increase from the 6.12% for the same period in 2000.88%. Third-quarter non-interest income fell 10%. falling 38. Profitability Analysis Risk-adjusted margin for Q3 2001 was 11.9 in Q3 2001 from $210. Sequentially. Managed delinquencies were 8. Thirdquarter net income per average account fell to $9.7 in Q3 2000.04%. Management has stated its expects losses of slightly more than 12% in Q4 2001.79%.66% in Q3. However. Providian noted that without the $85 million charge to recognize the uncollectible portion of accrued finance charges. an 83% decline from $55. and a 62-bp increase sequentially from 8.77%. largely a result of the incremental provision of $186 million during Q3 to strengthen its balance sheet. 79 .49% in Q3 2000.5 34.743 223. to $223.8 $210. Providian spent $39.6 in marketing per average account in Q3.2 from $171.90%.71% in Q3 2000.723 251.637 126. The Q3 provision for losses rose to $995.09% from 47.9 155. rising 316 bps from the 7.6 in Q3 2000. Similarly.

637 for the same period in 2000. Cost per net new account grew to $223.Financial Services/Specialty Finance Ending balance per average account rose 6%. a 77% increase year over year. 80 . compared to $1.2. to $1.743 in Q3.8 in Q3 from $126.

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a 19% increase in losses and a 9% increase in delinquencies year over year are still cause for concern.33 $3. • Delinquencies. 82 . Payment rates rose an average of 2. the lowest increase since June. as year-over-year increases in both losses and delinquencies appear to be slowing relative to data from the past several months.75 $3. Providian Financial Corporation Ticker AXP COF CCRT KRB MXT PVN Rating 3 2 3 1 2 4 Price $34. We believe that delaying this legislation will result in lower charge-offs for the near term. American Express.76 $1. in our opinion. Sequentially. A rise in payment rates is an indicator of improving future credit quality. on average.00 CY P/E 2001 2002 30. Sequentially. sourced from Bloomberg and Moody’s and updated monthly is. Capital One. losses rose at six of the ten issuers. Metris. 2001 October Master Trust Data Credit Quality Showed Slight Improvement Company Name American Express Company Capital One Financial Corporation CompuCredit Corporation MBNA Corporation Metris Companies Inc.0x 19.15 $2. Providian. the best indicator of future quarters performance of credit card companies.Financial Services/Specialty Finance November 27.3x 18.56 $3.8x 17.5x 7.3% higher year over year.91 $1.0x 14. a leading indicator to losses. However.1% year over year. Chase. • Portfolio yields fell.45 $8.14 $2.56 FY EPS 2001E 2002E $1.5x 8.S. but rose sequentially at eight of the ten issuers we follow by an average of 82 bps. delinquencies rose at six of the ten issuers we follow and rose an average of 5 bps overall. Fleet.80 $22.4x NA Source: Company data and Wachovia Securities estimates Key Points • Master trust losses at the ten issuers we follow (MBNA.11 $33. were an average of 9. • As so much of the health of the U. This represents the smallest increase since January.03 $1.S. • The static pool data.93 $2. consumer.0% year over year and 109 bps sequentially.05 $0. • Credit quality may be improving.7x 2.58 $54. but fell 8 bps overall. bankruptcy reform is now being perceived by many in Washington as being anticonsumer.7x 7.58 $1. economy is currently predicated on the state of the U.6x 7. Discover and First USA/Bank One) were an average of 19% higher year over year.50 $1. in absolute terms. Citigroup.8x 15. 5.

Charge-offs at Fleet were 6. Charge-offs at Citigroup were 4. after the grace period the company granted certain customers in the month of September. the company’s 1998-1 master trust has experienced a payout event due to a credit rating downgrade by Moody’s.48%. Charge-offs at MBNA were 4. rising 26 bps from 4. and were 26. This month’s yearover-year comparison is the highest in at least a year.18% from 4.0% and have remained close to that level since.64% in September. to 6. Delinquencies MBNA.3% year over year. First USA/Bank One. October losses in Discover’s master trust were 6. Delinquencies were 4. Providian.2% higher year over year. Charge-offs at American Express rose 49 bps in October.31% in October.2% higher year over year. 31 bps higher than the 5.16% in October from 13. to 8. 67 bps higher than the 4. Capital One. Discover. due to the company rebalancing the credit quality of its on.81% in September. MBNA was the only company we follow with year-over-year delinquencies remaining unchanged. rising 6 bps from 4. to 12.and off-balance-sheet portfolios. reaching a three-year high of 4. Chase’s master trust was the only one to see a decrease in losses year over year of the ten companies we follow.92%. October’s performance may be due to volatility in the trust performance and not a vast improvement in credit quality.3% annually.91% in September and up 27. when losses increased 1.1% year over year. October losses at Chase were 5. and are up 30.97% in October.92% in September. and 6. Providian is having difficulty with certain master trust series and. Fleet. 83 .3% year over year.25% in September and almost flat year over year. Citigroup. charge-offs reached a peak of 5. Metris. However.90% in October. this was the smallest year-over-year increase in charge-offs since March 2001. but were nearly flat year over year. improving 59 bps from 6. 29 bps lower than the 6. according to the Q3 10k. Losses at Providian rose 30 bps. In light of September 2001 losses being 24% higher year over year. and down 0. Charge-offs have been rising in the Capital One’s master trust. Losses at Capital One improved 8 bps in October.74% in September. American Express.82%. Losses at Metris fell 165 bps.7% higher year over year. In May. but were 6.Credit Cards 101 Discussion Charge-Offs MBNA.11% in September.04% in October from 7. Delinquencies were back to August levels in October.3% higher year over year. but were 63.71% in September. Chase.26% in September.12% in September and up 12. 36 bps higher than the 6.02%.8% compared to the same period in 2000.90% in September.1% compared to the same period in 2000. falling to 4.41% from 5. October losses at First USA/Bank One were 6.26% in September. and rose 18.

91% in September. an 18-bp decline.47%. 172 bps higher than the 20. Capital One’s master trust yielded 23. Fleet. The average yield on Chase’s portfolio was 19. This was the smallest annual change in at least a year.Financial Services/Specialty Finance Capital One. and only 2. American Express. but up 40. American Express’ master trust yielded 22. First USA/Bank One. This was the slowest increase since February 2001. Chase.27% from 14. Discover.50% in October. and fell 15.57% in September. Due to portfolio rebalancing. Delinquencies in October were 4.39% in October from 7. Metris. but was down 18.71%. This was the third straight month in which portfolio yield declined year over year. 32 bps lower than the 8.87% in September. Chase. Metris’ master trust yielded 26.56% in October.58% in September.3% higher year over year. 17 bps higher than the 3.3% compared to the same period in 2000.43% from 3.73% in September. and were 21. This was the largest year-over-year decrease of the ten companies we cover. to 3.3% higher compared to the same period in 2000. to 5. Metris.89% in September. falling 63 bps from 23. 84 . Delinquencies fell 28 bps in October.53%. to 3.1% annually.40% in September.21% in September. Providian.66% in September.8% year over year. Providian. but improved 4.88% in September.01% in October.8% year over year.2% year over year.0% year over year.9% year over year. and were 4. Discover delinquencies fell to 7.3% year over year.45% higher year over year. 13 bps higher than the 4.1% higher year over year.24% in October. American Express. MBNA’s master trust yielded 19.93% in September. October delinquencies at Chase were 4. when delinquencies rose 4. Capital One. Portfolio Yield MBNA.29% in October. but increased 11. Citigroup. year-over-year comparisons of delinquencies are much higher.04% in October from 4. but fell 2. and were 10% higher year over year. and was down 1. Delinquencies at Fleet fell 30 bps in October.30% in September and 13% higher year over year. but fell 1. October’s average yield rose 69 bps. Delinquencies at Capital One were 5. Citigroup. This was the largest year-over-year decrease in portfolio yield in at least a year. to 15.42% in September and 5. Delinquencies at Providian rose 12 bps. but fell 5. rising 31 bps from 17.03% in October. an increase of 59 bps from 18.7% compared to the same period in 2000. 16 bps lower than the 5. but fell 9.06% year over year. Master trust delinquencies at Metris were 8.16% in October.57% in September.50% in October. Providian’s master trust yielded 18.3% year over year.92% in September.70% in September.63% from 3. American Express had October delinquencies of 3. 39 bps lower than 26. rising 310 bps from 15. 29 bps higher than 4.

3% year over year. 85 . to 18. Payment rates rose 26 bps in October. but declined 4. Payment rates were 15.26% in October from 17. to 14.Credit Cards 101 Fleet.5% year over year.75% in September. Providian. First USA/Bank One. Capital One. but fell 11. October payment rates were 15.21% from 12. to 18. but fell 4.1% higher year over year.74% in October. Chase. to 13.4% lower year over year. October payment rates rose 113 bps. Discover.66% in September. Citigroup. and were 1. to 4.99% in September.59% in September. its largest decrease since June 2001.81 in September.4% year over year. American Express.68% in September.9% year over year. Payment rates at American Express were 16.34% in October from 16.79%. and 6. First USA/Bank One.44% in October. Payment rates in October rose 51 bps in October.06% in September and 8. but fell 6. to 15.12% in September. Payment Rates MBNA. Average portfolio yield rose 235 bps.23% in September and 26% higher year over year.8% higher year over year. Fleet’s portfolio yield rose 79 bps in October.2% year over year. Payment rates at Fleet were 11. but fell 1. and were 3. Payment rates at Citigroup were 18. Payment rates at MBNA rose 93 bps in October. Discover.4% higher year over year. 83 bps higher than the 15. 176 bps higher than 13.7% higher year over year.8% year over year.27% from 17.26% from 6. 143 bps higher than 10. Metris. but 5. rising to 7.2% higher year over year.31% in September and were 5. 273 bps higher than the 13.06% in October.58% from 4.28% in September. Fleet. Average yield on Discover’s master trust portfolio rose 45 bps.07% in September.88% from 13. but declined 11.48% in September. to 19. October payment rates at Providian were 58 bps higher.38% from 15.35% in October. 178 bps higher than 16.

74% 19.77% 6.07% 6.09% 20.21% 3.41% 17.83% 16.50% 11.54% 13.60% 5.01% 4.54% 4.08% 5.22% 6.61% 19.65% 15.82% 3.61% 6.53% Source: Bloomberg Market Data and Moody’s Research Yield MBNA Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 19.76% 4.30% 3.06% 4.07% 4.08% 27.20% 3.16% COF 22.15% 18.58% PVN 8.23% 27.23% 27.90% 6.79% 3.81% 12.68% 18.78% 20.20% 5.39% ONE 4.67% 18.75% 8.06% 18.69% 4.63% 4.30% 16.87% 3.28% 6.56% 13.76% 6.04% 16.78% 2.Financial Services/Specialty Finance Loss MBNA Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 3.16% PVN 6.92% 5.74% 8.74% 18.17% 10.41% 14.27% Chase 20.78% 4.74% 15.65% 5.47% Citi 3.27% 14.99% 14.92% COF 3.50% 3.65% 16.24% 4.28% 13.10% 21.76% 3.05% 4.75% 12.40% 26.93% 19.00% 17.30% 15.34% 6.80% 5.77% 5.00% 27.43% 5.76% 4.43% Discover 6.11% 5.32% 4.15% 6.67% 4.49% 16.12% 18.54% 6.09% 7.81% 4.91% 3.84% 12.61% 23.73% 3.60% 17.70% 14.47% 11.93% 18.06% 13.43% 19.39% 12.66% 4.48% 18.66% 5.25% 13.93% 4.11% 14.03% MXT 26.33% 4.49% 14.26% 6.39% 16.88% 7.70% 18.91% 3.20% 21.52% 23.03% 3.98% 7.10% 17.64% 4.34% 17.86% 14.57% 5.07% 7.75% 14.35% 4.06% 19.84% 3.04% 3.57% 6.57% 22.06% 15.57% 18.15% 10.19% 3.57% 19.00% 4.77% 4.86% 3.73% 14.83% 3.86% 4.74% 7.95% 14.90% 5.98% 19.37% 8.07% 13.05% 18.54% 14.24% 4.20% 18.03% 15.45% 5.45% 14.17% 21.48% 3.88% 16.12% 16.80% 6.37% 5.07% 20.72% 16.61% 26.72% 5.27% 14.61% 26.42% 4.48% 20.21% 4.68% 5.39% 6.66% 22.45% 13.02% 3.50% 6.71% 11.07% 4.80% 8.96% 22.04% 12.34% 23.29% 10.50% 4.36% 5.72% 7.99% 6.80% 4.14% 6.72% 15.91% 15.88% 3.28% 5.88% 4.51% 4.73% 4.28% 12.87% 23.86% 3.21% 6.27% Discover 19.19% 4.48% Source: Bloomberg Market Data and Moody’s Research MBNA Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 4.79% 18.96% 6.52% 27.27% 13.78% 13.31% 11.62% 31.20% 5.24% AXP 22.53% 8.94% 5.51% 5.26% 3.41% 12.08% 6.47% 16.13% 8.89% 26.60% 2.78% 27.34% Source: Bloomberg Market Data and Moody’s Research MBNA Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 12.03% 4.22% 3.25% 4.20% 7.00% 14.51% 4.21% 17.98% 3.92% 15.79% 19.62% 4.04% 20.51% 17.66% 18.96% 4.94% 18.75% 5.97% 6.06% Citi 19.97% COF 2.72% 14.40% 13.87% 4.08% 3.16% 6.05% 4.12% 4.88% 14.66% 4.63% 10.58% 6.21% 17.28% 8.37% 11.82% MXT 12.61% 5.44% Payment Chase MXT 14.47% 13.74% 19.49% 6.21% COF 15.96% 6.46% 3.41% 6.97% 19.66% 14.66% 13.66% 6.80% 17.71% 13.98% 4.84% 5.88% 19.63% 4.31% 12.68% 7.09% 14.02% ONE 5.92% 17.75% 4.10% 6.76% 8.67% 4.11% 10.32% 17.98% 19.84% 7.30% 7.24% 21.94% 4.83% 15.21% 7.43% 18.37% 6.97% 6.87% 22.81% 15.40% 4.82% 16.17% 4.22% 4.31% 14.06% 4.04% Fleet 4.04% Fleet 5.42% 27.91% 7.14% 8.68% 29.15% 18.68% 6.63% Delinquency Chase MXT 4.73% 19.62% 12.62% 9.29% 19.07% 3.22% 23.22% 6.79% 4.59% 4.89% 17.60% 14.46% 18.66% 19.31% Discover 5.90% 4.77% 8.01% Fleet 20.67% 19.78% 6.23% 6.53% 15.67% 4.80% 7.86% 4.83% 6.29% 4.55% 4.92% 9.85% 7.41% Citi 3.21% 13.43% 4.28% 4.84% 13.30% 4.40% 4.97% 13.84% 8.95% 24.22% 19.41% 3.55% 21.38% 4.30% 4.88% 8.60% 8.08% 6.11% 6.07% 20.78% 5.33% 8.43% 5.25% 16.70% 21.50% 18.29% 4.39% 19.85% 20.25% 21.10% 18.39% 19.14% 3.91% 15.35% 12.27% 6.50% 18.87% 14.64% 17.71% 6.74% 12.59% 14.46% 7.80% 15.11% 7.33% 20.51% 5.77% 4.62% 19.74% Discover 15.59% 15.26% Fleet 11.78% 11.64% 7.91% 4.95% 15.13% 4.00% 3.50% 18.18% 19.17% 3.23% 16.64% 5.60% 19.89% 15.53% 8.98% 4.45% 22.12% 6.26% 4.47% 13.88% 6.29% Citi 16.63% 4.37% 3.31% 7.40% 12.56% 2.13% 13.82% 4.64% 5.71% 8.98% 19.24% 5.88% AXP 12.11% 18.16% 7.50% 27.78% 19.65% 4.50% AXP 3.77% 4.28% 13.89% 7.31% 14.92% 6.55% 4.20% 6.60% 4.26% ONE 19.76% 12.32% 2.37% 5.52% 13.05% 4.73% 5.83% 13.04% 16.90% Chase 5.30% 5.75% 8.99% 19.87% 3.85% 6.21% 24.58% 14.18% AXP 5.50% PVN 21.38% ONE 14.90% 4.46% 27.35% Source: Bloomberg Market Data and Moody’s Research 86 .42% 17.39% 4.39% 4.98% 5.39% 4.12% 15.74% 21.39% 4.39% 14.31% 7.40% 15.15% 11.64% 4.91% 3.75% 17.00% 4.13% 4.13% 13.01% 23.68% 4.96% 4.48% 4.89% 3.79% 4.94% 7.81% 18.72% 12.99% 10.95% 18.49% 6.18% 3.48% 18.22% 21.11% 3.43% 7.15% 4.89% 6.40% 11.01% 15.52% 19.57% 22.58% 15.92% 18.97% 19.51% 5.53% 5.56% PVN 4.86% 4.41% 16.47% 14.75% 19.

0% 5.0% 5.5% Portfolio Yield 25.5% 7.0% ` 4. 87 . Citigroup. American Express. Fleet.5% 10. Discover. Capital One.5% 4.5% 12.Credit Cards 101 Average Master Trust Performance--Past Two Years Net Charge-Offs 8.5% 6.0% 21. First USA/Bank One.0% 10.0% ` Source: Bloomberg Market Data and Moody's Research Source: Bloomberg Market Data and Moody's Research * Includes MBNA.0% 12.0% 6.0% 11.5% 5.0% 20. Chase.5% 6.5% 13.0% 18.0% 24.0% 17.0% ` 11.0% 23. Providian.0% ` Delinquencies 6.0% 7.0% 19.5% 5.0% 22.5% 8.0% Source: Bloomberg Market Data and Moody's Research Source: Bloomberg Market Data and Moody's Research Payment Rates 13. Metris.

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