Вы находитесь на странице: 1из 89

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

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 Inc69 Providian Financial Corporation...73 October Master Trust Data.....77

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 companys 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.

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.S. consumer. We do not profess to have any crystal ball with respect to the state of the U.S. consumer, other than the current industry trends we outline herein; however, we do believe that, as evidenced through the data we have detailed, the average U.S. consumer is better off than many perceive. In fact, we believe the average U.S. 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 consumers ability to continue spending. It has been consumer spending that accounts for two-thirds of GDP growth, and with the recent pullback in consumer confidence and consequently, expenditure, GDP growth has slowed. In recent years, the negative savings rate that prevailed in the United States was believed to be a symptom of an unhealthy consumer balance sheet. In fact, we argue herein that the consumer has maintained a relatively stable balance sheet over the past decade. Though the U.S. consumer does have a negative savings rate, the U.S. consumers adjusted gross income, (income reported to the internal revenue service in order to calculate tax payments which includes not only salary and wages, but also capital gains, taxable interest, rents and royalties, and net income from estate or trust, to name a few) has grown faster than spending in the 1990s. Personal consumption expenditure grew at an average annual rate of 5.9% from 1990 to 1999. For the same period, adjusted gross income grew at an average annual rate of 6.2%. Although salaries and wages were a component of this growth, the main factor was the influence of capital gains on the U.S. consumer. For the period 1990-99, net capital gains (capital gains less capital losses) grew 358%, or a 18.4% CAGR, to $517 billion from $113 billion. 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. According to the Federal Reserve, in 1990 only 9% of total household assets were in mutual funds or equity assets. By 1999, U.S. households invested 23% of their assets into mutual funds and equity assets. 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. In fact, net capital gains as a percent of adjusted gross income almost tripled, growing to 8.8% in 1999 from 3.3% in 1990. Home Ownership Skyrocketed In The 1990s, As Did Home Values In 1994, legislation was passed making it easier to obtain a mortgage for home ownership. According to the Census Bureau, the historic home-ownership rate in the United States was 64%, but this changed after 1994, rising to 67% by 1999. While only a 3% jump in home-ownership rates, in absolute terms this was an increase of 7.7 million homes, rising to 69 million owned homes in 1999 from 62 million in 1994. The increase in home ownership lent itself to an increase in housing prices because of stronger demand. In 1990, the average value of a home was $70,785. By the end of the decade home values had increased by 36%, to $96,000 per average home. A further sign that the housing market was heating up was annual appreciation in housing prices. As calculated by Freddie Mac, prices accelerated to 5.7% in 1999 from 3.3% in 1990, a change of 75%. Lower interest rates also played a significant role in housing demand. In 1990, long-term interest rates were 8.1% and steadily declined throughout the decade, to 5.9% in 1999. This made the consumers cost of funds cheaper, making more people able to afford a home and increasing demand. The past decade was an outstanding environment for the U.S. consumer. Though consumers accelerated their spending, relative to adjusted gross income these increases were almost flat. Consumer expenditure relative to adjusted gross income actually fell 2.8% for the period 1990-99, even though consumers consistently spent more than they made, reaching a peak of 140% of

Financial Services/Specialty Finance

adjusted gross income in 1994. By 1999, this ratio had fallen to 111%. Consumers were able to do this by borrowing. Benefiting from lower borrowing costs, consumer debt relative to adjusted gross income grew 3.1% for the period 1990-99, peaking at 29% of adjusted gross income in 1994 and falling to 24% by 1999. An illustration of the consumers financial position during the past decade follows.

State Of The Consumer


# Of Households (MM) # U.S. Population (MM) Homeownership Rates # Of Owned Homes Appreciation In Housing Prices (Annual) Equity In Home 1990 93.3 249.5 64.0% 59.7 3.3% 61.7% 1991 94.3 252.2 64.1% 60.4 1.9% 59.6% 1992 96.4 255.0 64.2% 61.8 2.7% 58.5% 1993 96.4 257.8 64.0% 61.7 2.2% 57.1% 1994 97.1 260.3 64.0% 62.1 2.7% 55.8% 1995 99.0 262.8 64.8% 64.1 3.2% 55.7% 1996 99.6 265.2 65.4% 65.1 4.0% 55.4% 1997 101.0 267.8 65.7% 66.4 3.9% 55.5% 1998 102.5 270.2 66.3% 68.0 5.6% 54.9% 1999 103.9 272.7 66.8% 69.4 5.8% 54.5% CAGR % Change 1.2% 11.3% 1.0% 9.3% 0.5% 4.5% 1.7% 16.2% 6.4% 74.8% (1.4%) (11.7%)

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 $3,405 2,599 113.2 3.3% 3,889 6,608 805 7.9% 8.1% 1991 $3,325 2,566 101.6 3.1% 4,043 6,715 795 5.9% 8.1% 1992 $3,382 2,615 116.4 3.4% 4,345 6,948 801 3.9% 7.7% 1993 $3,366 2,615 141.6 4.2% 4,578 7,104 859 3.4% 6.6% 1994 $3,446 2,669 139.5 4.0% 4,833 7,281 984 5.3% 7.4% 1995 $4,189 3,201 170.4 4.1% 5,098 8,010 1,123 5.9% 6.9% 1996 $4,536 3,377 251.8 5.6% 5,366 8,563 1,212 5.5% 6.7% 1997 $4,970 3,614 356.1 7.2% 5,665 9,504 1,264 5.6% 6.6% 1998 $5,416 3,880 424.3 7.8% 6,027 9,216 1,332 5.1% 5.6% 1999 $5,852 4,174 516.8 8.8% 6,497 9,974 1,426 6.1% 5.9% CAGR % Change 6.2% 71.8% 5.4% 60.6% 18.4% 356.7% 11.5% 165.8% 5.9% 4.7% 6.6% (2.8%) (3.5%) 67.1% 51.0% 77.1% (22.6%) (27.5%)

State Of Consumer Per Household


Adjusted Gross Income Salaries And Wages Cap Gains Per Household Personal Consumer Expenditure Home Values Consumer Credit Outstanding 1990 $36,481 27,847 1,212 41,663 70,785 8,625 1991 $35,254 27,213 1,077 42,865 71,199 8,424 1992 $35,089 27,127 1,208 45,081 72,078 8,306 1993 $34,913 27,119 1,468 47,473 73,673 8,908 1994 $35,484 27,486 1,437 49,772 74,976 10,132 1995 $42,321 32,341 1,722 51,496 80,917 11,343 1996 $45,530 33,895 2,527 53,859 85,951 12,161 1997 $49,199 35,775 3,525 56,079 94,080 12,514 1998 $52,824 37,841 4,138 58,785 89,883 12,989 1999 $56,336 40,182 4,975 62,547 96,024 13,730 CAGR % Change 4.9% 54.4% 4.2% 44.3% 17.0% 310.4% 4.6% 3.4% 5.3% 50.1% 35.7% 59.2%

State Of Consumer Per Capita


Adjusted Gross Income Salaries And Wages Cap Gains Per Capita Personal Consumer Expenditure Home Values Consumer Credit Outstanding 1990 $13,651 10,420 454 15,590 26,487 3,227 1991 $13,186 10,178 403 16,033 26,630 3,151 1992 $13,262 10,253 456 17,039 27,243 3,139 1993 $13,059 10,144 549 17,758 27,558 3,332 1994 $13,236 10,253 536 18,566 27,968 3,779 1995 $15,941 12,182 648 19,397 30,479 4,272 1996 $17,102 12,732 949 20,231 32,285 4,568 1997 $18,560 13,496 1,330 21,155 35,491 4,721 1998 $20,041 14,356 1,570 22,302 34,100 4,928 1999 $21,460 15,306 1,895 23,826 36,578 5,230 CAGR % Change 5.2% 57.2% 4.4% 46.9% 17.2% 317.8% 4.8% 3.7% 5.5% 52.8% 38.1% 62.1%

As % Of Adjusted Gross Income Consumer Expenditure Consumer Credit

1990 114.2% 23.6%

1991 121.6% 23.9%

1992 128.5% 23.7%

1993 136.0% 25.5%

1994 140.3% 28.6%

1995 121.7% 26.8%

1996 118.3% 26.7%

1997 114.0% 25.4%

1998 111.3% 24.6%

1999 111.0% 24.4%

CAGR % Change (0.3%) (2.8%) 0.3% 3.1%

Source: Internal Revenue Service, Federal Reserve, Freddie Mac, and Census Bureau

Undoubtedly, the wealth effect also played a major part, with net capital gains as a percent of adjusted gross income rising to 8.8% in 1999 from 3.3% in 1990. Consumers saw their portfolio, IRA, and 401(k) value increasing, which fueled consumer confidence and spending. However, as we have shown in the preceding table, the consumer did not spend more relative to income in the latter part of the decade, in the midst of the bull market, than in the beginning. The American consumer, on average, is not overburdened with debt and is well prepared for a period of economic weakness, in our view. If consumers are willing to spend, they can and will. 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.

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. After the peak in Q1 2000 at 5.4% annual growth in consumer expenditure, for the past six quarters there has been decreasing growth, with Q3 2001 being the slowest, at 2.5%. Because consumer expenditure fuels the growth in credit card receivables and total volume, a slowdown in consumer expenditure could translate into a slowdown for the credit card industry and a bifurcation between industry leaders and laggards. There is evidence of this in Q3. While Providian was stating that it had seen consumer spending weaken as early as August, MBNA and Capital One each reported that spending was resilient, even in the wake of the attacks of September 11. Consequently, the consumers picture may not be as bleak as it was in 1991-92, when employment peaked and real personal consumption expenditure decreased for three straight quarters. According to our Wachovia Economics Group, unemployment is expected to worsen slightly. Unemployment is currently at 4.9%, up from its 20-year low of 3.9% in September 2000, and expected to climb to 5.5% in Q2 and Q3 of 2002. In June 1992, unemployment reached an 11year peak of 7.8%. During Q2 1992, personal consumption expenditure recovered and grew by 2.2%, following three straight negative quarters in 1991. Many have expressed concern that rising unemployment will stifle consumer spending. However, unemployment would have to worsen by 37% to return to its 1992 peak, and although personal consumption expenditure has slowed, it has yet to contract.

Financial Services/Specialty Finance

Unemployment

8.5% 7.5% 6.5% 5.5% 4.5% 3.5%


June 1992 7.8% Wachovia Estimate Peak:Q2 2002 & Q3 2002 5.5% Sept 2000 3.9%

Source: Federal Reserve and Wachovia Securities estimates

In October, the Federal Reserves monthly consumer credit report showed total outstanding consumer credit to be $1.60 trillion, 7.0% higher than in 2000, at $1.49 trillion. In addition, consumers are revolving $702 billion of that, up 8.0% from $650 billion in 2000. As shown in the following chart, the amount revolved of total consumer credit is approaching one-half of outstanding credit, up from 15% 20 years ago.

Consumer Credit Outstanding


1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

*September: Total Debt: $1.60 trillion Revolving Debt: $702 million

Revolving
Source: Federal Reserve

Total Consumer Credit

Approximately 90% of this revolving debt is credit card debt. This leaves little room for the American consumer to take on more, 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. Put simply, a consumer could increase his or her spending power by a factor of 5x before bumping against his or her credit limit. The larger question is, does the consumer have the inclination to spend more? Without the consumers inclination to do this, credit card companies may find it difficult to continue growing receivables at the pace of the past ten years.

Credit Cards 101

The following table compares the average credit lines, average open to buy, and utilization rates at the major credit card companies. These companies account for 80% of all receivables and are a good proxy for the industry. The average credit line in the industry is $6,362, and the average open to buy (or credit available) is $4,996. This translates to an industry utilization rate of about 21%, or $1,336. However, industry statistics could be misleading because they hide the bifurcation existing across the superprime, prime, and subprime market. The superprime and prime markets tend to use less of their available credit line, and therefore, have a high open to buy. This could be due to a combination of factors, including the fact that this segment usually has several credit cards. Second, the average superprime and prime customer possesses a healthier balance sheet than the average subprime customers. The subprime customer needs that credit line, as it is usually its sole means of obtaining a loan. Because of these factors, the average open to buy in the superprime and prime markets is most likely much higher than the subprime. The subprime generally has a higher utilization rate and lower available credit along with a smaller line of credit. 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.
Credit Card Statistics: Average Credit Line, 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 $7,500 $3,239 $1,850 $1,635 $1,273 NA NA NA $4,996

Utilization Rate 31.8% 35.2% 50.0% 34.6% 36.4% 77.0% NA NA 21.5%

$11,000 $5,000 $4,450 $2,500 $2,000 NA NA NA $6,362

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

Financial Services/Specialty Finance

Though total and revolving debt growth move together, revolving debt has grown faster in the past, as illustrated in the preceding chart. Of course, if existing credit card consumers still have the ability to increase their borrowing, then Americans can handle more debt and revolving debt will continue to outpace total consumer credit. To insure that consumers will be willing to spend more, the government is relying on consumers to spend their tax rebates and keep the economy afloat. We provide a copy of the letter every American received to inform them of the tax cut, as follows . Tax Rebate Letter

Dear Taxpayer:
We are pleased to inform you that the United States Congress passed and President George W. Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001, which provides long-term tax relief for all Americans who pay income taxes. The new tax law provides immediate tax relief in 2001 and long-term tax relief for the years to come. As part of the immediate tax relief, you will be receiving a check in the amount of $300.00 during the week of 9/24/2001. - IRS Notice of Status and Amount of Immediate Tax Relief
Source: Internal Revenue Service

The American Consumer And The Refinancing Boom This year, 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. This has most directly affected mortgage rates, through which Americans have taken the opportunity to refinance and get out of debt. During the last refinancing boom, in 1998-99, 35% of all refinancings were cash-outs, according to a study conducted by the Federal Reserve. The study found that 45% of cash-outs were used to repay other debts, with the average cash-out being at $18,000. The Federal Reserve estimates that $55 billion in home equity was cashed out during the refinancing boom. 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.

10

Credit Cards 101

Refi Index Yr/Yr Change 1100% 900% 700% 500% 300% 100% (100%) 8.2% 8.0% 7.7% 7.5% 7.2% 7.0% 6.7% 6.5% 6.2%

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. According to the Mortgage Bankers Association of America, the weekly refinancing index spiked up in January after the first 50-bp rate cut, and has averaged 493% over 2000 levels year to date. In the preceding chart, we plotted the refinance index against the 30-year fixed-rate mortgage rate (FRM). As the 30-year FRM has fallen 139 bps, to 6.37% from 7.79% in November 2000, the refinancing index has risen to 5,535 from 651, a 702% increase year over year. In the following chart, we plotted the refinancing index against the one-year adjustable-rate mortgage (ARM). During the past year, the one-year ARM fell 235 bps, to 5.11% in 2001 from 7.46% in 2000. 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. This allows them to pay down current debts and free up cash for future spending.

Refi Index Yr/Yr Change 1100% 900% 700% 500% 300% 100% (100%) 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0%

Refinance Index Source: Mortgage Banker's Association of America

1-Year ARM

11

Financial Services/Specialty Finance

However, how much longer can this refinancing boom last? After all, the Federal Reserve cannot cut rates indefinitely. The precipitous drop in both the 1-year ARM and the 30-year FRM has generated a financing boom, the second in the past three years, and the third in the past ten years. Over the past 11 years, the average refinancing boom has lasted 66 weeks, or 16.5 months. This refinancing boom began in January 2001 and is roughly 11 months old. Based on averages, this boom has 5.5 months left. However, past refinancing booms have been dictated largely by interest rate cuts and increases. Each of the past three booms began with a cut in rates and ended with the first sign of interest rate increases. The Federal Reserve has already cut interest rates ten times, for a total of 450 bps, and the Street is expecting more. If the economy shows signs of recovery, the Federal Reserve may keep interest rates constant, but the effects the attacks of September 11 has had on the economy may prolong a downturn. Whether the economy rebounds in 2002 or in 2003, the Federal Reserve will begin to raise rates, putting an end to the refinance boom and an end to the refinance money being freed up from mortgages. As mentioned, when homeowners refinance their mortgages, credit card debt generally gets paid off. This leads to an improvement in credit quality and lower charge-offs in the period following the refinancing boom. According to the Mortgage Bankers Association estimates, refinancings are estimated to reach $1.1 trillion in 2001, up 452% from 195 billion in 2000. In order to define the relationship between debt repayment and refinancing, we looked at data from previous refinancing booms. According to the Federal Reserve, during the 1998-99 boom, cash-out refinancing accounted for 35% of total refinancings and the Federal reserve estimates the total dollar amount at $55 billion. In 1994, only 25% of total refinancings were cash-outs. This is attributed to the steep rise in home prices in the years proceeding the 1998-99 boom. Homeowners used the refinancings to tap the higher equity in their homes. Of this, 45% of cash-out refinancing loans and 28% of cash-out loans in dollars were used to repay other debts. In the past two refinancing booms, the first in 1992-93 and the second in 1998, bank net charge-offs decreased, possibly as a result of refinancing freeing up cash to pay off other debts. 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, as illustrated in the following chart.
Bank Net Charge-Offs Versus Refinance Volume
Surge in refinancing followed by improving credit quality

$ Bill $1,200

All Bank Net Charge-offs 7.0%

$1,000

6.0%

$800 5.0% $600 4.0% $400 3.0%

$200

$0
1986 1987 1988 1989 1990 1991 1992 Source: Federal Reserve, Mortgage Bankers Association 1993 1994 1995 1996 1997 1998 1999 2000 2001E

2.0%

Refinance Volume

Bank Net Charge-offs

Source: Federal Reserve, Mortgage Bankers Association of America and Wachovia Securities estimates

12

Credit Cards 101

The Macro Picture


Growth In Personal Consumption Expenditure
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% (2.0%) Source: Bureau of Economic Analysis

Credit card companies earnings are highly correlated to economic variables such as personal consumption expenditure and bankruptcies. As shown in the preceding chart, the late 1990s and 2000 saw a steady upward growth in consumer spending. Although the U.S. economy has slowed, and unemployment and layoffs are rising, consumer expenditure continues to grow, but at a slower pace. The chart shows personal consumption expenditure on a monthly basis. As evidenced by the chart, there have been only four periods of sequential negative consumer expenditure growth since 1960. In September, personal consumption expenditure grew by only 1.2% in September, its slowest rate since December 1991. This was largely due to the attack of September 11. However, in August, personal consumption expenditure grew 3.1%, and discussions with card issuers tell us that spending is approaching pre-September levels.
Annual Percentage Change In Bankruptcy Filings 1991-2001 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% (5.0%) (10.0%) (15.0%)

Source: Administrative Office of the U.S. Courts

13

Financial Services/Specialty Finance

Turning to a second major variable affecting earnings, bankruptcies, the General Administrative Office of the U.S. Courts reports the number is rising. After a two-year period of decreasing annual growth, bankruptcies have returned. In Q2 2001, total filings were 400,394, up 24.5% from 321,729 compared to the same period in 2000 and the highest since the GAOs September quarter in 1990. Furthermore, this is the second consecutive quarter of year-over-year increases for filings. In Q1 2001, total filings numbered 366,841, the highest since June 1998 and 17.5% higher than in Q1 2000. Because bankruptcies account for between 30% and 50% of charge-offs at credit card companies, an increase of this magnitude is obviously significant. This is something watched closely because of its impact on earnings. A benefit for the credit card issuers is that Americans, as the past has shown, are not afraid to take on more debt. At year-end 1990, consumer credit outstanding was $800 billion. Only $250 billion of this, or 31%, was revolving. In 2000, consumer credit outstanding was at $1.6 trillion and revolving debt had climbed to $700 billion, or 44% of total consumer credit outstanding. During the ten-year period, total consumer credit grew 2.0x and revolving credit grew 2.8x, while nonrevolving debt has grown only 1.5x, to $872 billion from $554 billion. Clearly, Americans are not afraid of borrowing and, as we have illustrated, have done so in proportion to increases in income. Revolving credit card debt has almost tripled in the past ten years and has taken a 13% share from nonrevolving debt. If early indications are correct, the American consumer will continue to spend, increasing the amount of existing debt and the loan portfolios of the card issuers.
Revolving Debt In 1990

Revolving Debt In 2000

69%
56%

44%

31%

Non Revolving debt Source: Federal Reserve

Revolving debt

14

Credit Cards 101

The Market
The credit card market has seen significant growth over the past ten years. Between 1990 and 2000, credit card companies benefited from total charge volume, growing to $1.5 trillion from $466 billion, a 222% total increase and a compound annual growth rate of 12.4%. For the same period, debt outstanding grew to $675 billion from $242 billion, growing 179% and at a compound annual rate of 10.8%. During the 1980s, the industry was in its infancy, with total volume growing at 1.1% on average annually. The catalyst for the turnaround was that the nature of the industry changed. More merchants began to accept credit cards. Also, in the past, credit cards traditionally had been issued by banks and retail stores. In the early 1990s, a paradigm shift occurred with the emergence of the monoline credit card company. By segmenting the market and lowering rates to compete for new customers, credit card companies were able to reach untapped markets and add more cards to wallets. In the next ten years, charge volume and debt outstanding are expected to increase at a decreasing rate, according to the Nilson Report. Fueling this projected growth are rising personal income, increasing consumption expenditure, and credit cards stealing market share from other methods of payment. The Nilson Report estimates that volume will reach $3.1 trillion, implying an 8% compound annual growth rate, and that debt outstanding will reach $1 trillion, a 4% compound annual growth rate.
Total Charge Volume
1980-2010E
3500 3000

CAGR: 10.0%

2500 2000 1500 1000 500 0

Source: The Nilson Report

Total Debt Outstanding


1980-2010E
1200 1000

CAGR: 9.3%

800 600 400 200 0

Source: The Nilson Report

15

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. As credit cards take market share from paper (cash and checks), amounts in absolute dollars and number of transactions will increase. Bank cards (Visa and MasterCard issuers) alone are expected to complete $2.2 billion in volume and 15.3 billion transactions in 2010, according to the Nilson Report. That is roughly 2.6x and 1.7x current levels.

Projected Domestic Bankcard Volume


$Bill $2,500
Still room for growth
Mill

Projected Domestic Bankcard Transactions


18,000 43%
Still room for growth

77%

$2,000

14,000 48% 10,000 24%

$1,500

$1,000 6,000

$500

$1999 2005E Bank Card Volume Source: The Nilson Report 2010E Growth

2,000 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.S. consumer. We believe people are now more comfortable and prefer to pay for their goods and services with credit. This has been helped by increased wider acceptance of Visa, MasterCard, AMEX, and Discover by merchants, in our view. In 1990, cash was used in 85% of domestic transactions. In 1999, papers share of total transaction volume fell to 69%, and credit cards increased to 28% from 15% in 1990. Credit cards are expected to surpass cash as the preferred medium of exchange within the next ten years, according to the Nilson report. This would be an increase to 49% of all transactions from 28%, a change of 75% from current levels.

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

Credit Cards 101

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

17

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, CompuCredit

From 1988 to 2000, the monoline credit card companies grew to a 44% market share from just 4%, through organic growth and acquisition. Understandably, in the late 1980s there was little direct mail solicitation and, more important, it was only the beginning of the ever-important securitization. Without underestimating the need for both the ability to access the securitization market and the direct mail channels, the monolines found it easy to steal market share from the incumbent card issuers, the banks. Through their marketing expertise and sole focus on the credit card market, the monolines increased market share by 40 percentage points, while the banks divested their card divisions and sold off portfolios. 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.
$ 31.5 8.5 6.9 6.5 5.9 3.8 3.6 2.8

1998 Rec.
$ 39.0 20.9 17.6 12.3 12.2 11.0 10.8 10.4

2000 Rec.
69.9 69.6 48.9 32.2 21.0 14.5 14.3 14.3

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.
$ 96.2 70.4 67.0 36.2 26.7 26.3 15.1 14.8

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, we have every reason to believe the industry will continue to consolidate. As shown in the proceeding chart, the large players have $10 billion in receivables or more. As the industry will continue to see margin compression, due to an increasingly saturated market and higher funding costs, efficiencies of scale will be critical to maintaining profitability.

18

Credit Cards 101


Top 30 General Purpose Credit Card Issuers In Terms Of Outstandings ($Bil) January 2001
Top 30 Top 30 Mkt. 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. 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, Columbus Chemical Bank Corestates Bank First Deposit Bank Security Pacific First USA AT & T Universal USAA Fed. 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

31.5 11.6 11.2 8.5 6.9 6.5 5.9 3.8 3.6 2.8 2.6 2.3 2.2 2.1 2.0 2.0 1.9 1.8 1.7 1.7 1.6 1.5 1.4 1.3 1.3 1.3 1.3 1.2 1.2 0.8

25.0% 9.2% 8.9% 6.8% 5.5% 5.2% 4.7% 3.0% 2.9% 2.2% 2.1% 1.9% 1.7% 1.6% 1.6% 1.6% 1.5% 1.4% 1.4% 1.3% 1.3% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0% 0.9% 0.7%

97.9 70.5 70.5 57.3 50.2 37.4 30.5 29.9 25.5 14.9 14.5 10.1 9.4 9.4 5.0 3.6 2.7 2.4 2.2 2.1 2.1 2.1 1.9 1.8 1.7 1.2 1.9 1.8 0.9 0.8

17.4% 12.6% 12.5% 10.2% 8.9% 6.7% 5.4% 5.3% 4.5% 2.6% 2.6% 1.8% 1.7% 1.7% 0.9% 0.6% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% 0.3% 0.3% 0.2% 0.1%

MBNA America

Source: The Nilson Report

125.82

Ten years ago, the top 30 credit card issuers were more evenly distributed in terms of market share. Currently, the top ten companies control 82% of the market share, compared to 74% ten years ago. More to the point, Nos. 21-30 control 2.1% today, compared to 10.7% in 1990. 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. 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. Citigroup, MBNA, and First USA have been some of the most active acquirers in the past two years. Realizing that size and scale are the only way to be successful in the credit card game, the three have been very aggressive in buying not only industry laggards, but also larger companies portfolios, namely those of Associates and Wachovia.

19

Financial Services/Specialty Finance

The Usual Suspects:Notable 1999-2001 Domestic Portfolio Acquisitions


Seller Receivables (MM) 16,000 8,000 5,500 4,000 2,900 1,990 1,900 1,500 1,300 1,200 535 340 300 286 272 181 150 130 120 112 103 25 15 10 5 Accounts (MM) 25+ 2.8 3.3 24.0 3.3 1.2 0.8 1.4 0.6 0.6 0.4 0.5 0.9 0.2 2.3 0.1 NA 1.2 10.0 0.1 0.2 NA NA NA <0.1 Buyer Date

Associates Wachovia First Union JCPenney PNC Bank Partners First Mellon Bank Corp. SunTrust BankCard KeyCorp GE Capital The Huntington National Bank GE Capital Renaissance Holdings Inc. First Tennessee Shell Oil H&R Block CCB Financial Corp. BP America Citgo Petroleum Corp. Carolina First Bank First Virginia Banks Inc. Sanwa Bank California WesBanco Bank Wheeling Federal Deposit Insurance Co. 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. According to the Nilson Report, the top 25 companies have issued 88% of credit cards, handle 90% of transactions, have 88% of charge volume, and 92% of outstandings. Smaller companies likely will find it hard to compete and may throw in the towel. While the sector growth may slow as a result of macroeconomic factors in the economy, we believe companies with the lowest cost of capital and best management will be the growth leaders in the industry. These elite few should enjoy growth rates in excess of the industry and the economy. Further consolidation is likely to occur in the next few years, which should position a few players, namely MBNA and Citigroup, to dominate the industry at the expense of companies that do not have economies of scale or efficient marketing engines.

20

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; A rise in account acquisition costs; and A rise in bankruptcies. 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. Ten years ago, the credit card market was dominated solely by the banks, which had every advantage of marketing to their captive customer base. The emergence of the monoline credit card companies changed this. These companies specialized in segmenting the market and sending out direct mail that was tailored for the intended recipient. At first this strategy was overwhelmingly well received by the general public. In 1990, response rates were above 3.2%, according to BAI Globals Mail Monitor, compared to just 0.6% currently. Since the early 1990s, response rates have steadily declined, as mail volume increased by thousands of pieces each quarter. The market has become increasingly saturated, as the credit card industry repeatedly solicits the same households. The United States domestic market has been segmented and directly marketed to the point of near saturation. The card companies became so effective at acquiring new customers that they actually exhausted the supply of consumers in virtually all market segments. In 2000, a record 3.5 billion pieces of mail were sent to households. Unfortunately, this past year also set a record low for response rates--0.6%. Growth in mail volume is expected to continue as companies solicit for smart cards. In Q3 2001, 1.2 billion pieces were mailed, 32% more than the 888 million for the same period in 2000.

Quarterly Mail Volume And Consumer Response Rates


1,500 1,300 1,100 900 700 500 300 100 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 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Response Rates

21

Financial Services/Specialty Finance

We expect to see competition lessen slightly in Q4, due to Providians recent difficulties. Providian mailed 97 million pieces in Q3 and accounted for 9% of total mailings. As Providian exits the subprime and superprime markets to concentrate on its standard product, we expect mailings to decline from the company. Companies have already reported seeing fewer mailings from Providian and less competition for accounts in the abandoned market segments. The top ten direct mailers are listed in the following chart. 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. For 2001, we estimate a 15-20% increase in marketing to net new accounts and see an overall rising trend in marketing expense. This includes direct mailing, promotions, advertising, and special offers. The problem faced by the industry is the saturation level. We believe most cardholders already have all the credit cards they need. According to the Nilson Report, approximately 76% of adult Americans carry at least one card, up from 65% ten years ago. Cardholders had 9.10 cards on average in 2000, up from 8.31 in 1990. Of just bank cards (Visa and MasterCard), cardholders had 3.5 on average, versus 1.8 ten years ago. This makes organic growth much harder for bank card issuers Citigroup, First USA (Bank One), and the monolines. The credit card industry as a whole is spending more on marketing. According to company reports, the more competitive environment has compelled the companies to increase marketing expense in order to obtain new accounts and keep existing cardholders. The higher marketing expense is an additional drag on earnings and is squeezing profit margin. As margin comes down, credit card companies will have to make up the difference with receivable growth within their existing accounts. Bankruptcy And Net Charge-Offs In 2000, annual bankruptcy filings were down 4%. However, 2001 has progressed much differently. According to Visa USA, bankruptcy filings year to date are currently about 20% higher than in 2000.

22

Credit Cards 101

Initially, Visa was expecting bankruptcies to rise 23% in 2001, due to the passing of the bankruptcy reform legislation. However, according to Visa, efforts to pass bankruptcy legislation have stalled due to the September 11 attacks. Many in Washington feel that the bill, which would make it more difficult for consumers to completely escape their debts, is perceived as going against recent attempts to stimulate the economy and would actually hurt the consumer. As a result, Congressmen are reluctant to back the bill, and its passing has been effectively postponed indefinitely. The effects of the bills passing have been removed from Visas bankruptcy model for 2001 and 2002. Visa has revised its 2001 estimate to 21.1%, or 1,467,594 filings, down from 23%, or 1,490,767. Bankruptcies continue to trend higher. For the week of November 12-16, bankruptcy data showed filings of 30,805, up from 27,913 the week prior, and up 26% year over year. Visa expects bankruptcy filings in 2002 to be 17.7% higher than in 2001 or to have 1,727,121 total filings. This works out to an average of approximately 33,000 filings per week, versus an expected 28,000 filings per week in 2001 and 23,300 in 2000.
VISA Bankruptcies
40000 35000 30000 25000 20000 15000 10000

2001

Visa Forecast 2001: 1,467,594 filings 21.1% yr/yr change

1999 2000

1999
Source: Visa U.S.A.

2000

2001

We believe bankruptcies will be higher than credit card companies expect, and higher than Visas new forecasts. It is possible that much of this years bankruptcies were front-end loaded, peaking in March and April because of the hysteria surrounding the Bankruptcy Abuse and Consumer Protection Act of 2001 during that period. However, the attacks of September 11 may serve to further weaken the U.S. economic environment. 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. Using this as a basis, we expect bankruptcies during H2 to average between 30,000 and 31,000 per week, placing our estimate at 25.0%. We believe Visa bankruptcy data is an excellent leading indicator for the master trust data released by the credit card issuers each month. October master trust data showed evidence that losses are rising at the prime issuers. This is expected because prime customers are more likely to declare bankruptcy to protect their assets. An unbanked cardholder has less to protect and will, on average, avoid the collectors. However, the economic slowdown has taken its toll on the unbanked cardholder, as well. This was illustrated by Metris and Providian showing a rise in losses in the past several months. The subprime customer simply does not have as strong a balance sheet as a prime or superprime customer and, as a result, the economy has hit this segment hard. Because bankruptcies account for between 40-50% of net charge-offs, the rise in bankruptcies in 2001 will have a negative impact on net charge-offs and will hurt earnings, in our view.

23

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 MBNAs 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 industrys 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 companys 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 companys 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 companys 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.

27

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 88.4% 37.4% 193.1% 1998 87.5% (1.1%) 38.54% 3.1% 21.9% NA 23.70% NA 39.4% (1.8%) 27.7% (6.0%) 40.63% (0.9%) 42.61% 39.7% 1999 85.1% (2.7%) 43.34% 12.5% 23.2% 5.8% 27.22% 14.9% 40.0% 1.5% 31.2% 12.6% 39.51% (2.8%) 49.74% 16.7% 2000 84.1% (1.1%) 47.44% 9.5% 24.6% 6.0% 28.21% 3.6% 41.2% 3.0% 36.1% 15.8% 41.43% 4.9% 48.51% (2.5%) 2001E 80.6% (4.2%) 48.50% 2.2% 20.8% (15.4%) 28.84% 2.3% 38.5% (6.6%) 31.1% (13.8%) 38.85% (6.2%) 43.02% (11.3%) 2002E 78.8% (2.2%) 47.89% (1.3%) 20.2% (2.8%) 29.09% 0.9% 35.7% (7.2%) 30.4% (2.2%) 38.33% (1.3%) 39.19% (8.9%)

American Express
Yr/Yr Growth

Capital One Financial


Yr/Yr Growth

Citigroup CompuCredit
Yr/Yr Growth

NA NA
40.2% 29.4% 1033.9% 41.0% 237.0% 30.5%

Discover (MSDW)
Yr/Yr Growth

MBNA Metris Providian

Source: Company data and Wachovia Securities estimates

Fee income is becoming extremely important for earnings growth. Due to increasing pricing pressure, credit card issuers are finding it difficult to make money through net interest margin alone. With so many credit card companies competing, a cardholder can just switch to a lower interest rate card if finance charges are too high. The credit card companies have turned to fee income to stay competitive and continue growing. Also, for many subprime issuers to make a profit, it is necessary to earn a high amount of fees because the net interest income alone is not enough to cushion losses. In the previous four years, Providian and Capital One Financial have successfully implemented this. In 1997, Capital One, MBNA and Providian had 37%, 29%, and 31% fees per total net revenue, respectively. In 2000, this grew to 47%, 36%, and 49%, respectively. Providians fee growth is beginning to stagnate, as well. The factor behind this slowing in fee income is the class action suit filed against Providian in May 1999, accusing the company of illegally charging fees to its customers. As a result, fee revenue has declined. American Express, which boasts the highest percent of fees per total net revenue, due to its membership and merchant fee income, is coming under pressure due to the company shifting to a lending-based model. Difficulty is also coming from a saturated market, which is affecting the rest of the card companies. Provision For Losses Card companies estimate the losses they will incur in the future. A pool of reserves is built to protect from bankruptcies and delinquent loans. Generally, this pool is composed of funds taken from interest income and fee income--in short, earnings. When charge-offs are low, the card company builds up these reserves and accept more moderate earnings per share. When chargeoffs are high, the card company draws from the pool, which softens the impact of losses on earnings. This is a contra-asset account to income and negatively affects earnings when the provision must be increased due to rising losses.

28

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. Companies do not provision for securitized loans (loans that have been sold). This is a tool that credit card companies can use to manage earnings. By securitizing more loans and provisioning less, the company can use more income for earnings. Charge-offs from on-balance-sheet loans are absorbed by the loan loss reserve built from provisioning, while charge-offs from the securitized loans are a direct charge to income.

(Relative To Charge-offs + Delinquencies)

Loan Loss Provision


1997 73.4% 50.9% 80.1% NA 1998 75.4% 2.7% 52.3% 2.6% 79.1% (1.2%) 9.5% NM 65.5% 31.2% 45.5% 4.5% 69.6% (7.6%) 67.1% 7.8%

Full Year
Company Ticker AXP COF C CCRT 1999 76.5% 1.5% 45.7% (12.6%) 77.5% (2.1%) 16.5% 73.6% 37.6% (42.7%) 46.6% 2.3% 63.0% (9.5%) 73.1% 8.9% 2000 78.1% 2.0% 44.1% (3.6%) 73.3% (5.4%) 37.5% 127.3% 41.6% 10.7% 43.4% (6.8%) 59.3% (5.8%) 58.2% (20.5%) 2001E 83.5% 6.9% 46.1% 4.6% 73.6% 0.4% 49.6% 32.5% 44.1% 6.1% 53.1% 22.2% 59.0% (0.6%) 62.8% 8.0% 2002E 62.3% (25.3%) 76.9% 66.8% 75.2% 2.2% 60.8% 22.4% 53.3% 20.8% 50.9% (4.0%) 62.0% 5.1% 55.8% (11.2%)

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

49.9% 43.6% 75.4% 62.3%

MBNA
Yr/Yr Growth

Metris
Yr/Yr Growth

Providian
Yr/Yr Growth

Source: Company data and Wachovia Securities estimates


*Cardmember Lending Only

29

Financial Services/Specialty Finance

Risk-Adjusted Margin
As different companies take on differing risk with varied cost-of-capital advantages and disadvantages, analyzing companies through their risk-adjusted margin is the most appropriate way to view credit card companies on a level playing field, in our view. Risk-adjusted profitability is one of the best barometers of how well a particular company is operating. 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. 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. Credit card companies are the most nimble of all finance companies in their ability to reprice on a monthly basis. Thus, despite a fluctuating rate environment, these companies carry very little interest rate risk. 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

18.22% 4.42%

18.46% 1.3% 4.36% (1.5%) 12.37% 37.3% 6.69% 0.0% 22.63% 6.96% (8.0%) 11.17% (19.2%) 11.69% 34.2% 13.12% 25.8%

17.58% (4.8%) 4.22% (3.1%) 17.47% 41.2% 7.50% 12.1% 25.78% 13.9% 7.33% 5.3% 11.87% 6.3% 9.80% (16.1%) 18.51% 41.1%

15.95% (9.3%) 4.44% 5.1% 18.08% 3.5% 7.45% (0.7%) 14.29% (44.6%) 7.37% 0.5% 13.17% 10.9% 9.44% (3.7%) 16.97% (8.3%)

15.18% (4.8%) 4.37% (1.4%) 14.80% (18.1%) 7.00% (6.1%) 15.23% 6.5% 7.74% 5.0% 12.32% (6.5%) 8.08% (14.4%) 12.13% (28.5%)

18.15% 19.6% 4.60% 5.2% 12.38% (16.3%) 7.09% 1.3% 14.39% (5.5%) 7.11% (8.1%) 12.45% 1.1% 8.03% (0.6%) 6.05% (50.1%)

AXP Cardmember Lending**


Yr/Yr Growth

Capital One Financial


Yr/Yr Growth

COF C CCRT KRB MXT MWD PVN

9.01% NA NA 7.57% 13.82% 8.71% 10.43%

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

Credit Cards 101

The group has an estimated risk-adjusted margin in 2001 of 13.2%. Risk-adjusted margin in 1999 and 2000 was above the average mainly because of the absence of First USA from the market, 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. We forecast margin to be lower for this year and next, mainly because of First USAs re-emergence as a large mailer and higher charge-offs. Typically, the greater the risk assumed, the higher the risk-adjusted margin earned. However, due to the greater beta (risk premium) on potential losses in the riskier segments of the market, the stocks with higher risk-adjusted margin are discounted by investors. The one exception here is American Express. Its higher risk-adjusted margin is a result of its network fees, not greater lending risk. Expenses The credit card company has two major costs besides interest expense: operating and marketing costs. Operating expense results from servicing portfolios, costs to operate the network (if present), and salaries. These are necessary in maintaining the business. Marketing expense is designed to grow the business and include direct mailing, advertisements, and trial offers. When evaluating a company, it is important to look at expenses relative to revenue (efficiency ratio). If the ratio of expense to revenue is too high, the firm is operating inefficiently. Also, a drastic pullback in marketing could imply that a company is sacrificing future growth for present performance. The following chart shows the efficiency ratios at the major card issuers.

Earnings Per Share


Full Year
Company Ticker AXP 1997 $1.38 6.7% $0.93 20.7% 1998 $1.54 11.5% $1.32 41.7% $0.13 1999 $1.81 17.1% $1.72 30.4% $0.15 17.1% $1.66 129.7% $4.09 48.8% $1.21 25.0% $1.42 50.8% $1.89 (7.5%) 2000 $2.07 14.3% $2.24 30.0% $0.16 6.5% $1.80 8.5% $4.75 16.0% $1.53 27.0% $2.11 49.0% $2.73 44.1% 2001E $1.14 (44.8%) $2.91 29.9% $0.21 32.3% $1.03 (42.5%) $3.01 (36.7%) $1.93 26.0% $2.57 22.0% $1.76 (35.4%) 2002E $1.77 54.8% $3.50 20.2% $0.26 20.8% $1.15 11.1% $3.40 13.1% $2.33 20.6% $3.05 18.6% $0.00 NMF

American Express
Yr/Yr Growth

Capital One Financial


Yr/Yr Growth

COF

Citigroup*
Yr/Yr Growth

NA

CompuCredit
Yr/Yr Growth

CCRT

NA

$0.72 0.0% $2.75 32.5% $0.97 26.4% $0.94 (0.1%) $2.04 53.0%

Discover (MSDW)
Yr/Yr Growth

MWD

$2.08 NA $0.76 29.1% $0.94 60.9% $1.34 18.7%

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

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. We believe capturing a growing fee income from innovative products would also help to increase profitability. In conjunction with controlling expenses, avoiding risky accounts, and provisioning for losses successfully, we believe these strategies allow companies to deliver the best earnings results. The following table presents our evaluation of our companies based on their net income per account.
(Net Income Per Average Account)

Profitablity Per Account


1997 1998 $31.92 15.6% $19.35 3.9% $23.20 11.5% $235.09 $18.79 60.6% $21.78 2.5% $47.12

Full Year
Company Ticker AXP 1999 $38.13 19.4% $17.95 (7.2%) $20.20 (12.9%) $174.20 (25.9%) $17.19 (8.5%) $34.76 59.6% $54.23 15.1% 2000 $39.51 3.6% $16.32 (9.1%) $21.65 7.2% $96.33 (44.7%) $17.02 (1.0%) $48.81 40.4% $55.68 2.7% 2001E $35.47 (10.2%) $16.29 (0.2%) $19.59 (9.5%) $51.15 (46.9%) $14.32 (15.9%) $54.86 12.4% $28.81 (48.3%) 2002E $26.42 (25.5%) $15.10 (7.3%) $19.11 (2.4%) $54.08 5.7% $14.63 2.2% $59.66 8.7% $0.00 (100.0%)

American Express**
Yr/Yr Growth

$27.60

Capital One Financial


Yr/Yr Growth

COF

$18.63

Citigroup
Yr/Yr Growth

$20.81

CompuCredit
Yr/Yr Growth

CCRT MWD MXT

NA $11.70 $21.26 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, Inc. maintains a market in the common stock of CCRT. First Union Securities, Inc. or a predecessor, managed or comanaged a public offering of securities for AXP, C, CCRT, COF, KRB, and MXT within the past three years.

32

Credit Cards 101

Appendix A

33

34

Managed Receivables
Full-Year
1997 $38,100 15.0% $67,232 11.9% $43,547 47.5% $107,396 5.0% $1,900 24.3% $53,581 13.7% $49,704 10.9% $97,680 10.0% $90,417 18.5% $10,144 29.3% $30,500 36.8% $92,585 9.3% $11,024 24.8% $32,254 31.4% $11,124 20.0% $32,681 20.5% $28,405 28.5% $45,625 44.6% $109,166 9.5% $1,939 22.0% $54,219 9.5% $97,586 11.0% $11,651 22.9% $32,447 14.2% $40,700 6.8% $50,400 23.8% $57,700 14.5% $60,105 4.2% $56,600 11.0% $57,300 12.4% $56,100 10.0% $60,105 17.9% $62,427 22.4% 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E

Quarterly

Quarterly
Q202E $63,718 24.9% $51,497 46.0% $110,341 7.1% $1,980 18.4% $54,674 8.9% $100,363 11.0% $11,955 17.9% $33,586 10.1% Q302E $66,723 30.8% $60,017 55.9% $111,425 6.4% $2,055 13.9% $55,358 11.4% $102,770 11.0% $12,475 13.2% $35,104 8.8% Q402E $67,232 31.8% $65,744 51.0% $113,807 6.0% $2,145 12.9% $54,674 2.0% $108,425 11.0% $12,994 16.8% $37,115 13.6%

Company

Ticker

American Express

AXP

Yr/Yr Growth

Capital One Financial


$14,231 11.1% $65,744 51.0% NA $78,800 $17,395 22.2% $20,237 16.3% $29,524 45.9% $43,547 47.5% $31,551 55.4% $35,283 61.2% $38,489 59.4%

COF

Yr/Yr Growth

Citigroup
$85,100 8.0% $102,300 20.2% $107,396 5.0% $113,807 6.0% $99,700 16.2% $103,000 12.4% $104,700 7.9%

Yr/Yr Growth NA $899 $2,145 12.9%

CompuCredit
$899 20.8% $1,528 70.1% $1,900 24.3% $1,590 54.9% $1,672 42.7% $1,805 36.6% $35,950

CCRT

Yr/Yr Growth

Discover (MSDW)
$32,502 (9.6%) $37,975 16.8% $47,126 24.1% $53,581 13.7% $54,674 2.0% $49,493 17.9% $50,227 14.9%

MWD

Yr/Yr Growth

MBNA
$49,380 58.2% $108,425 11.0% $12,994 16.8% $37,115 13.6% $9,483 28.6% $3,547 119.5% $9,704 0.0% $13,245 0.0% $21,026 0.0% $27,123 29.0% $32,681 20.5% $5,315 49.8% $7,281 37.0% $9,273 27.4% $11,124 20.0% $59,641 20.8% $72,256 21.2% $88,800 22.9% $97,680 10.0% $87,915 20.4%

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

(As % of Average Managed Receivables)

Net Charge Offs


Quarterly

Full-Year
1997 6.00% 5.8% 30.7% 4.75% 19.3% 5.75% 36.3% 14.75% 75.7% 5.70% 52.0% 5.75% 18.8% 15.00% 78.7% 5.8% 13.7% 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E

Quarterly
Q202E 5.8% 1.8% 6.00% 50.8% 5.75% 4.4% 15.00% 78.7% Q302E 5.8% 3.6% 6.00% 53.1% 5.75% 4.4% 15.00% 78.7% Q402E 5.8% 0.9% 6.25% 31.6% 5.75% 0.0% 15.00% 78.7%

Company 6.40% 6.7% 3.92% 3.2% 5.00% (21.9%) 4.26% (14.8%) 5.44% 27.6% 5.77% 6.1% 5.10% 10.9% 5.70% 29.5% 5.60% 30.2%

Ticker

American Express

AXP

Yr/Yr Growth

Capital One Financial


6.34% 53.4% NA 5.67% 5.12% (19.2%) 3.85% (24.9%) 3.90% 1.3% 4.02% 3.1% 6.25% 55.5% 3.75% (3.1%) 3.98% 0.3%

COF

Yr/Yr Growth

Citigroup
4.91% (13.4%) 4.28% (12.9%) 5.27% 23.3% 5.74% 8.9% 4.84% 4.1% 5.51% 27.5% 5.51% 39.5% NA 3.45%

Credit Cards 101

Yr/Yr Growth

CompuCredit
4.64% 34.5% 10.00% 115.8% 14.33% 43.3% 15.00% 4.6% 14.80% 76.3% 14.60% 73.9% 14.60% 73.9%

CCRT

Yr/Yr Growth

Discover (MSDW)
6.95% 28.0% 6.90% (0.7%) 5.42% (21.4%) 4.40% (18.8%) 6.00% 36.4% 6.00% 0.0% 4.79% 2.8% 4.98% 18.3%

MWD

Yr/Yr Growth

5.79% 38.5%

6.00% 31.3% 5.25% 35.7%

6.00% 25.3% 5.45% 25.3%

6.00% 20.5% 5.45% 13.1%

6.00% 3.6% 5.45% 11.2%

6.00% 0.0% 5.45% 3.8%

MBNA
3.99% 19.1% 8.35% 35.6% 10.13% 21.3% 7.56% 13.0% 6.94% (8.2%) 7.71% 11.1% 10.71% 38.9% 15.00% 40.1% 9.34% 30.1% 6.69% 39.0% 9.87% (2.5%) 9.71% (1.7%) 10.90% 12.2% 11.50% 5.5% 10.60% 9.2% 4.31% 8.0% 4.10% (5.0%) 3.97% (3.0%) 4.73% 19.0% 5.45% 15.3% 4.35% 7.1%

KRB

Yr/Yr Growth

4.82% 22.0% 10.90% 14.7% 10.29% 38.7%

4.90% 26.3% 10.90% 11.2% 10.77% 41.5%

Metris

MXT

Yr/Yr Growth

12.22% 26.0% 12.20% 43.9%

11.25% 6.1% 13.00% 39.2%

11.25% 3.2% 13.00% 26.3%

11.50% 5.5% 13.00% 20.7%

11.50% (5.9%) 13.00% 6.6%

Providian

PVN

Yr/Yr Growth

Source: Company data and Wachovia Securities estimates

35

Financial Services/Specialty Finance

Delinquencies
(As A Percent of Ending Total Managed Receivables)
Full-Year
Company Ticker AXP 1997 3.50% 1.10% 1998 3.10% (11.4%) 0.90% (18.2%) 4.70% (24.1%) 1.76% (26.5%) 5.3% (7.1%) 2.4% (22.0%) 14.1% 0.0% 5.7% 1999 2.60% (16.1%) 0.80% (11.1%) 5.23% 11.3% 1.99% 13.3% 5.7% 6.4% 2.3% (5.3%) 9.7% (31.0%) 4.1% (28.2%) 6.3% (3.2%) 2.5% (10.9%) 4.45% (3.3%) 4.45% (3.3%) 7.65% 12.2% 3.71% 13.4% 5.66% 6.1% 2.55% 13.9% 2000 2.76% 6.2% 0.88% 10.0% 5.23% (0.0%) 2.00% 0.3% 4.9% (13.4%) 1.5% (36.7%) 13.4% 37.9% 6.4% 55.2% 5.9% (6.3%) 2.4% (4.3%) 4.94% 11.0% 4.94% 11.0% 8.28% 8.3% 3.95% 6.4% 7.52% 32.9% 3.22% 26.6% 2001E 3.50% 26.8% 1.20% 36.4% 4.95% (5.3%) 1.90% (5.0%) 4.3% (12.9%) 1.9% 29.0% 13.3% (0.7%) 6.4% 0.0% 6.5% 9.8% 2.5% 3.3% 4.23% (14.4%) 4.23% (14.4%) 8.89% 7.4% 3.90% (1.2%) 7.30% (2.9%) 3.04% (5.7%) 2002E 3.20% (8.6%) 0.90% (25.0%) 5.00% 0.9% 1.90% 0.0% 5.3% 23.3% 1.9% 0.2% 10.7% (19.5%) 4.4% (31.3%) 5.4% (16.3%) 2.3% (8.4%) 4.90% 15.8% 4.90% 15.8% 8.00% (10.1%) 3.90% 0.0% 7.60% 4.1% 3.30% 8.6% Q101A 2.90% 11.5% 0.90% 12.5% 4.72% (10.2%) 1.91% (11.8%) 4.8% 4.1% 1.8% 23.3% 13.4% 35.4% 6.7% 48.7% 6.3% 13.6% 2.7% 19.7% 4.60% 5.7% 1.43% (6.4%) 8.42% 10.0% 4.12% 13.6% 7.64% 33.5% 3.67% 34.8%

Quarterly
Q201A 2.90% 20.8% 1.00% 25.0% 4.92% (8.1%) 1.81% (12.0%) 5.5% 27.5% 1.7% 36.6% 14.7% 48.4% 7.3% 60.2% 5.8% 14.3% 2.6% 29.4% 4.57% 2.9% 1.54% (7.4%) 8.33% 8.8% 3.95% 9.1% 8.03% 23.9% 3.45% 18.2% Q301A 3.20% 23.1% 1.00% 25.0% 5.20% (2.3%) 2.08% (2.2%) 5.5% 39.5% 1.8% 36.3% 14.8% 49.5% 7.8% 72.8% 6.3% 15.1% 2.6% 18.1% 4.23% (9.0%) 1.63% (2.1%) 8.89% 16.2% 4.30% 18.7% 8.65% 29.0% 3.98% 42.7% Q401E 3.50% 26.8% 1.20% 36.4% 4.95% (5.3%) 1.90% (5.0%) 5.8% 36.3% 1.9% 29.0% 13.3% 34.0% 6.4% 41.1% 6.5% 9.8% 2.5% 3.3% 4.23% (14.4%) 1.65% 5.4% 8.89% 16.2% 3.90% 7.6% 7.30% (3.0%) 3.00% (6.9%) Q102E 3.50% 20.7% 1.20% 33.3% 5.00% 5.9% 1.90% (0.4%) 5.8% 18.8% 1.9% 3.0% 13.3% 34.0% 6.4% 41.1% 5.4% (14.2%) 2.3% (16.4%) 4.23% (8.0%) 1.65% 15.2% 8.89% 16.2% 3.90% 7.6% 7.60% (0.5%) 3.30% (10.0%)

Quarterly
Q202E 3.50% 20.7% 1.20% 20.0% 5.00% 1.7% 1.90% 5.2% 5.8% 4.4% 1.9% 10.4% 13.3% 34.0% 6.4% 41.1% 5.4% (6.8%) 2.3% (11.9%) 4.23% (7.4%) 1.65% 7.0% 8.89% 16.2% 3.90% 7.6% 7.60% (5.3%) 3.30% (4.5%) Q302E 3.50% 9.4% 1.20% 20.0% 5.00% (3.9%) 1.90% (8.5%) 5.8% 4.4% 1.9% 4.5% 13.3% 34.0% 6.4% 41.1% 5.4% (13.8%) 2.3% (12.3%) 4.23% 0.0% 1.65% 1.5% 8.89% 16.2% 3.90% 7.6% 7.60% (12.2%) 3.30% (17.1%) Q402E 3.20% (8.6%) 0.90% (25.0%) 5.00% 0.9% 1.90% 0.0% 5.8% 0.0% 1.9% 0.2% 13.3% 34.0% 6.4% 41.1% 5.4% (16.3%) 2.3% (8.4%) 4.23% 0.0% 1.65% 0.0% 8.89% 16.2% 3.90% 7.6% 7.60% 4.1% 3.30% 10.0%

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 6.20% 2.40%

5.7% 3.1%

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 7.0% 3.1% CCRT

6.5% (6.4%) 2.8% (7.5%) 4.60% 0.0% 4.60% 0.0% 6.82% 4.0% 3.27% 4.3% 5.33% 26.4% 2.23% 19.0%

MBNA
Total Delinquencies Yr/Yr Growth KRB 4.60% 4.60% 6.56% 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

4.22% 1.88%

Source: Company data and Wachovia Securities estimates


Issuing to the under-served market yields wider net interest margins, but higher delinquencies, as well.

Represents Credit Card Segment Data

36

(as % of Total Net Revenue)

Efficiency Ratios
Quarterly
Q201A Q102E 59.9% 5.9% 57.32% (6.0%) 30.3% (19.1%) 34.6% (21.1%) 41.9% (13.1%) 36.55% (7.5%) 29.72% (5.2%) 35.2% (5.5%) 37.8% (5.1%) 29.85% (11.7%) 30.26% (5.9%) 39.3% 1.8% 41.5% (14.0%) 34.62% (18.6%) 30.28% (6.2%) 31.57% (6.4%) 38.2% 10.4% 56.5% (5.0%) 61.13% (3.8%) 32.4% (13.7%) 35.1% (7.8%) 45.2% (6.3%) 36.85% (14.9%) 40.3% (16.4%) 34.3% (12.8%) 30.0% (20.2%) 30.3% (19.1%) 35.0% (23.3%) 60.41% (5.2%) 60.42% (2.6%) 58.7% (1.8%) 57.3% (7.2%) Q301A Q401E

Full-Year
1997 60.1% (6.5%) 42.61% 24.0% NA NA 37.2% NA 28.1% NA 41.4% 1.3% 40.36% (9.3%) 26.37% (0.8%) 34.77% (8.6%) 37.45% 7.7% 37.80% 1.0% 36.73% (2.8%) 38.24% 4.1% 34.6% (9.1%) 31.82% 20.7% 32.39% 1.8% 30.89% (4.6%) 30.17% (2.3%) 32.30% (0.5%) 40.83% 1.2% 39.93% (2.2%) 36.16% (9.4%) 31.12% (13.9%) 42.53% (5.9%) 47.5% 14.7% 47.7% 0.5% 43.8% (8.2%) 41.5% (5.1%) 48.3% 0.1% 46.0% 63.8% 41.0% (10.8%) 36.9% (10.1%) 34.5% (6.4%) 43.9% 9.3% 36.6% (1.6%) 36.8% 0.5% 31.7% (13.7%) 30.3% (4.4%) 34.7% (7.6%) 53.21% 24.9% 64.20% 20.7% 63.29% (1.4%) 60.70% (4.1%) 56.57% (6.8%) 60.95% (4.8%) 60.3% 0.3% 62.6% 3.7% 60.6% (3.1%) 57.2% (5.6%) 60.6% 6.0% 56.6% (8.1%) 1998 1999 2000 2001E 2002E Q101A

Quarterly
Q202E 60.5% 7.1% 56.02% (8.4%) 30.3% (19.1%) 34.4% (1.9%) 41.5% (13.9%) 31.29% (15.1%) 30.13% (4.6%) 38.2% 8.6% Q302E 61.0% 4.0% 56.91% (5.8%) 30.3% (19.1%) 34.7% 1.1% 41.5% (14.0%) 29.70% (18.7%) 30.12% 1.4% 38.2% 1.2% Q402E 61.2% 6.7% 56.14% (7.1%) 30.3% (19.1%) 34.3% (2.0%) 41.7% (13.6%) 29.28% (1.9%) 30.16% (0.3%) 38.2% (2.6%)

Company

Ticker

American Express

AXP

Yr/Yr Growth

Capital One Financial

COF

Yr/Yr Growth

Citicorp

Credit Cards 101

Yr/Yr Growth

CompuCredit
40.9%

CCRT

Yr/Yr Growth

MSDW/Discover
44.51% (6.7%) 26.59% (0.2%) 38.05% 837.7%

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

38
Marketing Spend Trends
(Per net new account added) Full-Year
1997 Q102E $136.18 (31.0%) $345.40 158.1% $257.94 323.1% NE NE NE NE # $825.00 $71.15 NM* $377.88 (54.2%) $104.57 16.2% $39.66 NM $2,602.50 NM NE NM NE NM $322.20 (4.8%) $158.75 (40.3%) $192.04 19.9% $2,145.53 1081.4% $440.01 272.6% $251.17 56.8% NM NM $171.36 (46.8%) $960.05 198.2% $210.00 177.2% $223.78 39.7% $138.47 5.7% $148.81 146.8% $95.15 54.6% $141.13 48.3% $265.74 88.3% $184.29 23.8% $338.47 83.7% $157.70 13.9% $184.83 17.2% $292.44 (88.8%) $315.10 7.7% $286.36 (28.4%) $286.00 (28.5%) $372.86 (6.8%) $59.69 50.5% NM NM $156.12 NM $155.53 284.4% $175.61 352.8% NM NM NM NM $89.81 (14.1%) $100.29 11.7% $119.33 19.0% $85.63 (36.0%) $163.24 22.0% $141.02 5.4% $68.09 (49.1%) $236.49 (37.4%) $314.72 33.1% $275.35 (12.5%) $197.33 13.3% $244.55 6.3% $496.67 38.7% NM NM 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E

Quarterly

Quarterly
Q202E $252.18 3.1% $56.44 (57.8%) $250.02 440.4% NE NE Q302E $478.08 (3.7%) $584.67 336.9% $129.04 207.9% NE NE Q402E $703.05 6.7% $85.22 (36.3%) $104.53 132.3% NE NE

Company

Ticker

American Express
$90.00 26.5%

AXP

Yr/Yr Growth

Capital One Financial NA NA


$120.00 $34.86 $188.34 $61.53 $131.01 9.2% $60.30 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

$235.70 52.6% $679.17 324.0%

$749.31 34.9% $154.86 (3.3%)

$388.36 88.3% $209.34 30.7%

$235.12 112.0% $163.32 2.0%

$245.51 104.2% $129.60 (19.1%)

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, and more dollars spent per new account.

*MBNA estimate annualized

* No net new accounts added

Fee Trends
(As A Percent Of Total Net Revenue) Full Year Quarterly
2000 84.1% (1.1%) 47.44% 9.5% 24.6% 6.0% 28.21% 3.6% 41.2% 3.0% 36.1% 15.8% 41.43% 4.9% 48.51% (2.5%) 43.02% (11.3%) 39.19% (8.9%) 47.19% (4.8%) 38.85% (6.2%) 38.33% (1.3%) 38.41% (10.3%) 40.62% (2.7%) 45.47% (8.5%) 31.1% (13.8%) 30.4% (2.2%) 30.3% (8.3%) 30.4% (10.5%) 38.5% (6.6%) 35.7% (7.2%) 39.9% (6.3%) 38.5% (5.1%) 38.4% (9.0%) 32.1% (6.4%) 37.98% (8.4%) 40.93% (8.8%) 28.84% 2.3% 29.09% 0.9% 28.16% (0.5%) 28.16% 2.7% 29.99% 11.5% 20.8% (15.4%) 20.2% (2.8%) 21.1% (9.7%) 22.2% (13.7%) 19.9% (20.1%) 20.2% (17.4%) 28.93% (3.5%) 37.3% (5.9%) 31.5% (24.1%) 38.42% (3.7%) 38.55% (22.4%) 48.50% 2.2% 47.89% (1.3%) 49.60% 12.3% 49.15% 3.6% 47.91% (0.7%) 47.66% (3.3%) 47.82% (3.6%) 20.2% (4.0%) 28.82% 2.3% 35.8% (10.2%) 28.5% (6.0%) 38.10% (0.8%) 39.19% (16.9%) 80.6% (4.2%) 78.8% (2.2%) 82.3% (2.4%) 81.7% (3.2%) 79.1% (6.2%) 79.1% (6.2%) 78.7% (6.7%) 2001E 2002E Q101A Q201A Q301A Q401E Q102E 1997 88.4% 87.5% (1.1%) 38.54% 3.1% 21.9% NA 23.70% NA 39.4% (1.8%) 27.7% (6.0%) 40.63% (0.9%) 42.61% 39.7% 49.74% 16.7% 39.51% (2.8%) 31.2% 12.6% 40.0% 1.5% 27.22% 14.9% 23.2% 5.8% 43.34% 12.5% 85.1% (2.7%) 1998 1999

Quarterly
Q202E 78.9% (6.5%) 47.82% (2.7%) 20.2% (8.9%) 29.18% 3.6% 35.7% (7.1%) 29.0% (4.4%) 38.41% (5.4%) 39.19% (13.8%) Q302E 78.8% (6.6%) 47.82% (0.2%) 20.2% 1.7% 29.18% (2.7%) 35.8% (6.9%) 30.9% (3.5%) 38.43% 1.2% 39.19% (4.2%) Q402E 78.8% (6.6%) 48.06% 0.8% 20.2% 0.0% 29.18% 0.8% 35.5% (4.8%) 32.8% 4.0% 38.34% (0.2%) 39.19% 1.7%

Company

Ticker

American Express
37.4% 193.1%

AXP

##

Yr/Yr Growth

Capital One Financial NA NA


40.2%

COF

Yr/Yr Growth

Citigroup

Yr/Yr Growth

Credit Cards 101

CompuCredit

CCRT

Yr/Yr Growth

Discover (MSDW)
29.4% 1033.9% 41.0% 237.0% 30.5%

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

40

Net Interest Margin Trends


(As A Percent Of Average Receivables)
Full-Year
1997 10.3% 10.6% 2.6% 10.1% (6.7%) 10.3% 15.4% 21.0% (5.5%) 8.7% 7.9% 9.2% 20.9% 14.9% 9.1% 8.9% 23.0% 14.7% 11.4% 13.2% (0.8%) 9.6% (9.2%) 9.1% (4.9%) 10.1% 10.6% 10.5% 4.2% 9.6% 1.7% 9.8% 9.5% 10.6% 13.3% 10.6% 13.9% 10.6% 10.8% 10.1% (4.8%) 10.3% 8.3% 21.0% (2.8%) 9.0% 16.5% 8.8% 8.0% 14.8% 6.5% 12.8% (0.4%) 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E

Quarterly

Quarterly
Q202E 10.6% 8.3% 10.1% 2.6% 10.3% 6.9% 21.0% (5.2%) 9.0% 10.2% 8.8% (0.9%) 14.8% 2.6% 12.8% (2.5%) Q302E 10.6% (0.1%) 10.1% 5.5% 10.3% (1.7%) 21.0% (2.6%) 9.0% 3.2% 8.9% (3.8%) 14.8% (0.4%) 12.8% (0.9%) Q402E 10.6% 0.0% 10.0% 8.1% 10.3% 0.0% 21.0% 0.0% 9.0% 3.5% 8.9% 0.1% 14.8% 1.0% 12.8% (2.7%)

Company

Ticker

American Express
9.6%

AXP

Yr/Yr Growth

Capital One
10.8% 11.9% 12.1% 12.3% 9.5% 22.7% 14.2% 9.1% (4.9%) 7.9% (3.5%) 13.2% 4.1% 13.4% 1.9% 14.2% 5.9% 14.8% 4.0% 13.9% 3.5% 7.2% (7.9%) 8.6% 18.5% 8.7% 0.9% 8.1% 7.9% 8.9% 18.2% 14.4% 7.3% 8.2% (10.3%) 8.3% 1.0% 9.1% 9.4% 7.7% (1.0%) 8.1% (0.1%) 8.7% 8.0% 22.0% (3.0%) 21.0% (4.6%) 20.7% (1.7%) 21.6% (11.5%) 22.2% (8.4%) 21.6% (10.1%) 9.5% 0.0% 8.8% (7.2%) 9.7% 9.9% 9.5% 2.5% 9.6% 11.3% 10.4% 20.3% 11.6% (4.4%) 9.7% (16.1%) 9.7% 0.2% 10.0% (0.3%) 9.9% 1.6% 10.0% (5.6%)

COF

Yr/Yr Growth

Citigroup* NA
19.9% NA 9.6% 2.5% 8.2% (0.1%) 12.6% (3.4%) 9.4% 8.2% 13.1%

NA

NA

Yr/Yr Growth

CompuCredit

CCRT

Yr/Yr Growth

Discover (MSDW)

MWD

Yr/Yr Growth

MBNA

KRB

Yr/Yr Growth

Metris
11.9%

MXT

Financial Services/Specialty Finance

Yr/Yr Growth

Providian
11.9% (0.2%) 12.8% 7.8% 12.7% (0.7%) 13.0% 2.4% 12.8% (1.7%)

PVN

Yr/Yr Growth

12.8% 5.0%

13.1% 7.9%

12.9% (0.7%)

Source: Company data and Wachovia Securities estimates

(As A Percent Of Average Managed Receivables)

Risk-Adjusted Margin
Quarterly

Full Year
Ticker AXP 4.42% COF C CCRT KRB MXT MWD PVN 10.43% 8.71% 13.82% 7.57% NA 22.63% NA 6.69% 0.0% 25.78% 13.9% 7.33% 5.3% 11.87% 6.3% 9.80% (16.1%) 18.51% 41.1% 16.97% (8.3%) 12.13% (28.5%) 6.05% (50.1%) 14.99% (12.2%) 9.44% (3.7%) 8.08% (14.4%) 8.03% (0.6%) 8.02% (9.7%) 13.17% 10.9% 12.32% (6.5%) 12.45% 1.1% 11.97% (13.2%) 13.40% (1.4%) 8.26% (13.0%) 13.80% (17.8%) 7.37% 0.5% 7.74% 5.0% 7.11% (8.1%) 7.31% 1.7% 7.93% 7.0% 14.29% (44.6%) 15.23% 6.5% 14.39% (5.5%) 15.27% (40.4%) 16.24% (32.6%) 16.20% (25.7%) 8.69% 12.3% 13.05% (3.0%) 8.35% (14.5%) 11.10% (30.7%) 7.50% 12.1% 7.09% 1.3% 7.15% 2.3% 7.51% 5.1% 9.01% 14.45% (17.2%) 7.10% (0.1%) 14.80% (20.1%) 7.75% (8.9%) 12.35% 1.5% 7.84% (10.4%) 9.20% (48.6%) 4.72% (5.0%) 4.80% (5.0%) 13.56% (15.3%) 7.10% (0.7%) 14.50% (5.0%) 6.83% (6.7%) 12.35% 3.2% 7.98% (0.5%) 8.05% (46.3%) 18.22% 18.46% 1.3% 4.36% (1.5%) 12.37% 37.3% 7.45% (0.7%) 7.00% (6.1%) 6.81% (1.4%) 17.47% 41.2% 18.08% 3.5% 14.80% (18.1%) 12.38% (16.3%) 16.00% (11.6%) 15.40% (16.2%) 15.31% (17.4%) 4.22% (3.1%) 4.44% 5.1% 4.37% (1.4%) 4.60% 5.2% 4.66% (4.9%) 3.95% (4.1%) 5.05% (5.3%) 17.58% (4.8%) 15.95% (9.3%) 15.18% (4.8%) 18.15% 19.6% 15.22% (10.5%) 16.40% (5.6%) 15.99% (36.7%) 16.05% (4.7%) 15.14% (0.5%) 1997 1998 1999 2000 2001E 2002E Q101A Q201A Q301A Q401E Q102E

Quarterly
Q202E 15.00% (8.5%) 4.75% (4.9%) 13.26% (13.9%) 7.10% 4.2% 14.65% (9.8%) 6.95% (12.4%) 12.35% (7.8%) 7.97% (3.5%) 8.05% (41.6%) Q302E 14.93% (6.6%) 4.69% (4.9%) 13.26% (13.4%) 7.10% (5.4%) 14.65% (9.6%) 7.41% (14.7%) 12.35% (5.4%) 7.98% (4.4%) 8.05% (27.5%) Q402E 18.12% 12.9% 4.78% (5.0%) 12.91% (10.6%) 7.10% 0.0% 14.65% (1.0%) 7.80% 0.6% 12.35% 0.0% 7.92% 1.1% 8.05% (12.5%)

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 6.96% (8.0%) 11.17% (19.2%) 11.69% 34.2% 13.12% 25.8%

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

42
(Relative to Charge-offs + Delinquencies)

Loan Loss Provision


Quarterly
Q201A 84.3% 1.0% 49.5% 1.0% 75.1% 2.3% 49.0% 11.6% 48.8% 9.2% 75.5% 2.9% 75.6% 3.1% 52.0% 10.1% 47.9% 11.3% 57.7% 30.1% 62.8% (4.9%) 55.6% (31.2%) 64.5% (4.9%) 56.8% (2.0%) 59.1% (4.0%) 66.5% (15.5%) 50.7% 1.8% 48.5% (4.7%) 52.7% (2.7%) 75.6% 3.1% 52.8% 1.3% 53.2% 24.9% 56.8% 14.6% 62.6% 3.9% 63.2% (15.3%) 83.7% 34.4% 96.9% 8.0% NE NA Q301A Q401E Q102E Q202E NE NA 53.1% 7.3% 75.6% 3.1% 52.7% 7.7% 53.2% 15.3% 56.0% (0.6%) 62.5% (2.6%) 62.7% (11.3%)

Full-Year
1997 73.4% 50.9% 80.1% NA 16.5% 73.6% 49.6% 32.5% 60.8% 22.4% 52.1% 26.3% 75.4% 2.7% 52.3% 2.6% 79.1% (1.2%) 9.5% NM 37.5% 127.3% 77.5% (2.1%) 73.3% (5.4%) 73.6% 0.4% 75.2% 2.2% 73.8% 0.6% 45.7% (12.6%) 44.1% (3.6%) 46.1% 4.6% 76.9% 66.8% 54.2% 10.7% 76.5% 1.5% 78.1% 2.0% 83.5% 6.9% 62.3% (25.3%) 89.8% 15.0% 1998 1999 2000 2001E 2002E Q101A

Quarterly
Q302E NE NA 52.7% 4.0% 75.6% 3.1% 52.5% 7.7% 53.1% 9.1% 56.0% (2.9%) 62.6% (0.3%) 62.6% (26.7%) Q402E NE NA 54.5% 12.4% 75.6% 3.1% 52.5% 1.0% 53.5% 11.7% 55.7% (2.0%) 62.6% 5.9% 62.5% (41.4%)

Company

Ticker

American Express*

AXP

Yr/Yr Growth

Capital One Financial

COF

Yr/Yr Growth

Citigroup

Yr/Yr Growth

CompuCredit
49.9% 43.6% 75.4% 62.3%

CCRT

Yr/Yr Growth

MSDW/Discover
65.5% 31.2% 45.5% 4.5% 69.6% (7.6%) 67.1% 7.8% 73.1% 8.9% 58.2% (20.5%) 62.8% 8.0% 55.8% (11.2%) 60.8% (28.5%) 63.0% (9.5%) 59.3% (5.8%) 59.0% (0.6%) 62.0% 5.1% 60.2% (5.9%) 46.6% 2.3% 43.4% (6.8%) 53.1% 22.2% 50.9% (4.0%) 49.6% 3.4% 56.3% 21.6% 64.2% (0.1%) 37.6% (42.7%) 41.6% 10.7% 44.1% 6.1% 53.3% 20.8% 42.6% (7.6%) 46.2% (1.2%)

MWD

Yr/Yr Growth

48.7% 11.7%

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

(Net Income Per Average Account)

Profitablity Per Account


Quarterly
Q201A Q102E $27.94 (29.8%) $15.43 (5.6%) NE NA $52.03 (64.0%) $13.21 (4.3%) $60.05 29.9% $53.43 0.8% $9.69 (82.8%) $57.34 31.2% $0.00 NM $53.10 (63.2%) $14.87 14.4% $58.51 16.8% $0.00 NM $38.62 (7.0%) $16.65 (2.6%) $19.43 1.7% $52.66 (63.5%) $15.30 (26.8%) $55.28 13.2% $17.27 (21.3%) $57.55 (60.1%) $24.45 7.6% NE NA $16.89 (2.2%) $16.49 1.6% $18.17 (55.3%) $24.33 (33.9%) Q301A Q401E Q202E $24.27 (37.2%) $15.31 (8.0%) NE NA $55.04 (61.9%) $14.59 (4.6%) $61.20 10.7% $0.00 NM

Full Year
1997 $27.60 $31.92 15.6% $19.35 3.9% $23.20 11.5% $235.09 $18.79 60.6% $21.78 2.5% $47.12 $54.23 15.1% $55.68 2.7% $28.81 (48.3%) $0.00 NM $54.76 1.8% $34.76 59.6% $48.81 40.4% $54.86 12.4% $59.66 8.7% $50.11 (11.8%) $17.19 (8.5%) $17.02 (1.0%) $14.32 (15.9%) $14.63 2.2% $13.00 (9.0%) $174.20 (25.9%) $96.33 (44.7%) $51.15 (46.9%) $54.08 5.7% $36.88 (74.4%) $20.20 (12.9%) $21.65 7.2% $19.59 (9.5%) $19.11 (2.4%) $20.30 3.7% $17.95 (7.2%) $16.32 (9.1%) $16.29 (0.2%) $15.10 (7.3%) $16.35 (6.2%) $38.13 19.4% $39.51 3.6% $35.47 (10.2%) $26.42 (25.5%) $39.81 4.3% 1998 1999 2000 2001E 2002E Q101A

Quarterly
Q302E $20.96 15.4% $15.34 (9.2%) NE NA $55.92 (61.3%) $14.63 (15.3%) $61.28 2.1% $0.00 NM Q402E $31.25 28.4% $15.36 (6.8%) NE NA $56.58 (60.8%) $14.38 8.8% $60.80 6.0% $0.00 NM

Company

Ticker

American Express**
$18.63

AXP

Yr/Yr Growth

Capital One Financial


$20.81

COF

Yr/Yr Growth

Citigroup
NA $11.70 $21.26 NA

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

Financial Services/Specialty Finance

44

Credit Cards 101

This page intentionally left blank.

45

Financial Services/Specialty Finance

Appendix B

46

Credit Cards 101

The following pages contain previously published company notes.

47

Financial Services/Specialty Finance

October 22, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

American Express Company (AXP-NYSE)


Earnings Estimates Revised Down

3
$29.19 $61-24 1,344.0 39,231.4

Company Continues To Struggle During Economic Softness Earnings Estimates Revised Down
EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.48 0.54 0.54 0.50 $2.07 14.1x $2.07 14.1x 2001 $0.40 0.13 0.22 0.38 $1.14 25.6x $1.14 25.6x E A A A 2002 E $0.45 0.43 0.38 0.49 $1.75 16.7x $1.75 16.7x 2001 Rev. $5,381.0 MM 4,910.0 5,478.0 5,589.0 $21,877.0 MM 2002 Rev. $5,668.0 MM 5,785.0 5,824.0 6,009.0 $23,286.0 MM

Source: Company data and Wachovia Securities estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
American Express Company, founded in 1850, provides travel-related services, financial advisory services, and international banking services throughout the world.

NE 1,005.0 6,727,440 1,081.59 $0.32/0.8%

LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$4,859.0 29.0% 14% 12% 2x

Key Points American Express reported Q3 2001 results of $0.22 per share versus $0.54 in Q3 2000 and toward the low end of the range of analysts estimates. The companys quarterly results were driven largely by a significant drop in corporate spending and a material decline in the companys discount rate. Discount revenue, a product of both volume and fee base, was down almost 5% from Q3 2000. We continue to believe that American Express remains an expense-reduction story. The company stated that during the first nine months of the year, $700 million in cost savings has been realized and 6,100 jobs have been eliminated. However, inclusive of these strides, the TRS division, which represents the bulk of the companys earnings, has an efficiency ratio of 59% (52% exclusive of marketing), by far the highest in the credit card industry. We certainly appreciate that American Express has a "higher-end" customer that requires higher levels of service; however, we concur that the companys expenses are simply too high. During the conference call, management stated that it expects a weak economic environment into 2002 and that spending during October was running in the negative double-digit area. Accordingly, we lowered our 2001 and 2002 estimates to $1.14 and $1.75 from $1.45 and $2.25, respectively.

48

Credit Cards 101

Q3 2001 Results
American Express reported Q3 earnings per share of $0.22, versus $0.54 in Q3 2000. These results were $0.08 below the consensus estimate of $0.30. The combination of slowing business and consumer spending, along with a $540 million pretax restructuring charge and one-time expenses were significant factors behind the quarters weakness. During the conference call, management stated it expects a weak economic environment into 2003. Because the business model is so highly leveraged to strong spending trends, both corporate and consumer, we have lowered our estimates for 2001 and 2002 to $1.14 and $1.75 from $1.45 and $2.25, respectively. Travel Related Services Revenue in Q3 from TRS was $4.5 billion, 2% higher from $4.4 billion during the same period in Q3 2000. This represents the third straight quarter of decelerating year-over-year growth in revenue at the companys flagship unit. The company cited a substantial decrease in corporate travel, entertainment spending, and consumer travel since September 11 as a major factor, as well as $195 million in restructuring charges and $87 million in expense related to the attack of September 11. Managed Receivables Total managed receivables during Q3 for U.S. lending was $31.3 billion, compared to $27.1 billion in Q3 2000, a 15% increase. However, charge card receivables decreased to $24.8 billion in Q3 2001, from $28.1 billion in Q3 2000, resulting in a 12% decrease. These two statistics personify the shift in business that the company has undertaken. The company is evolving from a highmargin charge card business to a lower-margin credit card model. Within the TRS unit was total spending per basic card falling 10%, to $1,846 in Q3 2001, from $2,041 in Q3 2000. Account Growth During Q3 2001, the company grew total cards in force 9%, to 54.9 million from 50.4 million in Q3 2000. Basic cards grew 8%, to 42.3 million in Q3 2001, from 39.2 million compared to the same period in 2000. As American Express continues to grow its cards in force, we believe the vast majority of these new cardholders are convenience users and do not hold the traditional cachet of the American Express cardholder. American Express generates lower margin from its convenience card users, and accordingly, we expect margin to continue to erode. Net Interest Income Third-quarter net finance charge revenue was $829 million, up 33% from $623 million in Q3 2000. Once again, gains in net interest income were largely due to lower cost of funds. Non-Interest Income American Express shift toward a lending model affects the TRSs fee income most directly. While net card fees rose 1%, to $424 million in Q3 2001 from $420 million in Q3 2000, average fee per card declined to $34 in Q3 2001, falling 6% from $36 in Q3 2000. The company reported this was mainly the result of an increased number of cards in force, but offset by a shift to lower and no fee products.

49

Financial Services/Specialty Finance

50

Credit Cards 101

Discount revenue for Q3 was $1.9 billion compared to $2.0 billion in Q3 2000, a decrease of 5%. Lowered billed business and a lower discount rate were the primary reasons for the decline. The average discount rate fell to 2.67% in Q3, versus 2.70% in Q3 2000, a 3-bp drop. A growing share of the cardholders use their American Express cards for convenience, for example, buying toilet paper at Costco, versus the traditional American Express cardholder buying luxury goods at a highend retailer. As this shift continues, fee income will continue to decline. Write-Downs And Restructuring Charges American Express has taken the following write-downs and one-time charges in 2001, in an effort to revitalize the business. In Q1 2001, American Express wrote down $185 million related to bad investments in its high-yield portfolio. In Q2 2001, the company took a write-down of $826 million to restructure its investment portfolio and write down additional high-yield investments. In Q3, American Express took a $352 million restructuring charge, as well as a $98 million one-time expense as a result of the attacks of September 11. In total, these write-downs and expenses have totaled $1.5 billion. Credit Quality U.S. lending Q3 managed net charge-offs were 5.6%, up 130 bps from 4.3% during the same period in 2000. American Express cited a weaker economy and some short-term impact on customers from the attacks of September 11. Total managed delinquencies in Q3 rose 60 bps, to 3.2% from 2.6% in Q3 2000. Along with rising losses, loss reserves also rose. Reserves as a percentage of total loans rose to 3.3% in Q3, a 60-bp increase from 2.7% in Q3 2000. American Express master trust data for Q3 shows continued poor performance in losses and delinquencies year over year. Loss July August September 6.50% 6.61% 5.92% Yr/Yr change 14.44% 16.99% 11.70% Delinquencies 3.17% 3.14% 3.30% Yr/Yr change 7.46% 7.17% 7.84%

Source: Bloomberg and Moodys Research

During Q3 2001, the year-over-year change in losses averaged 14.4%, just slightly below the annualized change in Q2 of 15.8%. Delinquencies averaged a 7.5% year-over-year increase in Q3, even with year-over-year increases during Q2.

Profitability Analysis
Return On Average Assets And Average Equity The Q3 return on average assets for TRS was 2.6%, down 40 bps from 3.0% in Q3 2000. Return on average equity was 27% in Q3 2001, down 560 bps from 32.6% in Q3 2000. American Express Financial Advisors Revenue was down 10% during Q3 at AEFA, to $1.4 billion, from $1.5 billion in Q3 2000. The company cited lower management fees due to market depreciation during the period, lower

51

Financial Services/Specialty Finance

spreads on investment portfolio products due to the portfolio repositioning, and weak mutual fund sales as factors behind the decrease in revenue. Weak equity markets have hurt AEFA for the third straight quarter, as cash sales decreased 33% in Q3, to $11.4 billion from $17 billion in Q3 2000. Most notable was that mutual fund sales were down 37%, to $7.3 billion from $11.7 billion, and institutional sales were down 75%, to $488 million in Q3 from $1.9 billion in Q3 2000. Asset values continued to move with the equity markets as asset values at AEFA decreased 20%, to $234 billion in Q3 2001, from $294 billion in Q3 2000. The company attributed the decrease to overall depreciation in the U.S. equity markets.

Federal Court Rules Against Visa And MasterCard Associations


Impact On American Express Given that U.S. banks will no longer be barred from issuing cards other than Visa or MasterCard, companies such as American Express and Discover will have an entirely new distribution channel available. American Express has argued that roughly 50% of new card originations occur at a bank branch, and its inability to access this distribution network has been a competitive disadvantage. The ruling will allow banks to issue American Express cards, as well as Visa and MasterCard, giving the company an equal footing. Currently, American Express has more than 70 partners in 77 countries where these bylaws were unenforceable. Once given access to the domestic bankcard market, the company could potentially expand both its market penetrations and its receivable base. Accordingly, American Express lending portfolio would take on an increasingly important role, something the company has been pushing to do in order to capture more spread revenue. However, a shift to a lending model could mean lower profitability and lower multiples for the stock. The Effort To Build Spread Business Throughout the 1990s, American Express worked toward expanding its product offering to offer not only the basic charge card, but also an array of revolving card products, and as a result, card growth has accelerated. Because the market is already saturated for its traditional charge card, American Express had to look to other sources to continue to grow accounts. From 1996 to 2000, spread revenue has grown to 16% from 12% of net TRS revenue. We believe spread revenue will continue to grow as a percentage of net revenue. The growth in this revenue item is a reflection of American Express enhanced focus on the credit card market, which should only increase as the company issues more cards through U.S. banks. In 2000, total global cards grew at an annual rate of 12%, compared to 8% and flat growth in 1999 and 1998, respectively. As focus shifts to the credit card, a greater percentage of earnings should come from the credit card product. Accordingly, we believe overall returns will come down, given the lower margin inherent in spreads versus fees. Along with lower profitability comes margin compression. American Express has traditionally enjoyed a higher margin than its monoline credit card peers, largely due to its emphasis on highly profitable accounts. American Express currently trades at 14x next years earnings, the highest of its peers excluding MBNA. However, of its peers, it has the second-lowest return on equity in the group, with CompuCredit being the lowest. We have highlighted the impact this transition will have on returns in the following graph.

52

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% 22.7% 22.0% 22.2% 25.0%

25.8%

Spread as % of Total Net Revenues


Source: Company data and Wachovia Securities estimates

Discount Fee Implications However, the positive impact from account growth and receivable growth, we believe, could potentially be offset by a negative impact on discount rates, as well. In the past few quarters, the company has reported average discount rates declining, citing everyday spending as the cause. Accordingly, American Express original value proposition of higher-margin, larger-spending customers should deteriorate further as American Express bank cards are brought to market.

Merchant Coverage
U.S. Merchant Coverage By Industry All Industries Traditional T&E Oil Retail Supermarkets Merchant Coverage in Markets Outside the U.S.
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

Financial Services/Specialty Finance

While we think this victory for the Department of Justice will have favorable implications for American Express growth, we remain somewhat concerned about the status of discount fees, which contribute historically 32% of net revenue and an estimated 29% of net income. In the past, American Express has targeted the high-end customer. Accordingly, American Express has been able to charge merchants the highest discount fees, arguing that its customers charge more per visit and purchase higher-margin items. History has proven this argument valid. However, we believe it is possible that adding incremental accounts through bank channels will lower discount fees further. To achieve reasonable growth through bank channels, American Express will have to expand its customer demographic. This should result in acquiring customers that charge less and purchase lower-margin items. Accordingly, average spending per account will decrease, diminishing American Express historical value proposition of higher spending and buying highermargin goods. Merchants will demand lower rates to adjust to the lower spending, resulting in a decrease in fees that American Express charges. This is why we believe the company is now focusing more on the lending business.

Summary
American Express is facing pressure from many different sources. It is in the midst of shifting its business model from a high-margin charge card business to a lower-margin lending business. It is unclear how this new model will succeed in the extremely competitive credit card industry. Second, the recession has resulted in a slowdown in corporate spending, and travel and expense revenue has all but evaporated for the firm. Finally, it appears that the company has begun efforts to control its expenses, but the process has been anything but easy. The attacks of September 11 threw the company another batch of one-time charges with which to contend. With little certainty regarding the economy, as well as earnings visibility at the company, we maintain our Market Perform rating on the stock.

54

Credit Cards 101

October 30, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

CompuCredit Corporation (CCRT-NASDAQ)


Earnings Reported

3
$6.19 $34-6 46.6 288.5

Q3 Results--We Reiterate Our Market Perform Rating On The Shares


EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.54 0.53 0.48 0.24 $1.79 3.5x $1.79 3.5x 2001 $0.13 0.32 0.32 0.27 $1.03 6.0x $1.03 6.0x E A A A 2002 E $0.27 0.28 0.29 0.31 $1.15 5.4x $1.15 5.4x 2001 Rev. $119.0 MM 125.2 134.4 136.8 $514.8 MM 2002 Rev. $141.6 MM 145.3 149.6 155.7 $592.1 MM

Source: Company data and Wachovia Securities estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
CompuCredit, an Atlantabased company, is a direct marketer of bank credit cards and other ancillary products to a strictly underserved market.

NE 11.0 112,750 1,060.03 $0.00/0.0%

LT Debt: LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$0.0 NA 14% 10% 0.6x

Key Points CompuCredit reported Q3 2001 EPS of $0.32, versus $0.48 per share in Q3 2000. The quarter missed consensus estimates by $0.01 on a GAAP basis, and by $0.02 on a managed basis. The company revised its previous guidance to reflect its more cautious outlook. However, with such consistent revisions to guidance, it is difficult to gain much confidence in the companys internal earnings outlook. Pro forma net charge-offs in Q3 were 14.6%, flat with Q2, and down from 14.8% in Q1 2001. Previously, management stated that charge-offs would peak in Q1. Currently, management believes charge-offs will remain in the 15% area through 2002. Previously, management had guided to 30-35% receivable growth; however, due to what the company characterizes as a 74% decline in spending from August to September, receivable growth should fall below the originally guided range. We believe the earnings outlook for this company is uncertain at best. New guidance provided by the company did not assume a material change in the economy. We lowered our Q4 2001 estimate to $0.27 from $0.30. Our revised 2001 estimate remains at $1.03. We also lowered our 2002 estimate to $1.15 from $1.30, to account for a lack of earnings predictability in 2002. With such little conviction in our estimates, we believe that even at 5x our 2002 estimate, the stock has limited upside. Accordingly, we reiterate our Market Perform rating on the shares.

55

Financial Services/Specialty Finance

Q3 Results CompuCredit reported Q3 2001 EPS of $0.32, versus $0.48 per share in Q3 2000. Net Interest Income In Q3, the managed net interest margin fell to 21.5%, decreasing 50 bps from 22.0% in Q2 and 190 bps from 23.4% in Q3 2000. Although the Fed cut interest rates by 75 bps during the quarter, CompuCredit experienced a decline in net interest margin. Management stated that the 50-bp decline was primarily attributable to product mix. Response rates have increased for lower APR, higher fee type products. With the expected continuation in this product shift, we expect the net interest margin to remain flat or down in Q4 2001. Non-Interest Income Third-quarter non-interest income was $40.3 million, rising 14% from $35.3 million in Q2 2001, the largest sequential increase since the end of 2000. Highlights of the quarter were ancillary revenue increasing 18%, to $8.7 million in Q3, from $7.4 million in Q2. This was the first quarter of positive sequential growth in ancillary revenue since Q4 2000. Other credit card fees increased 15% during Q3, to $23.9 million from $20.7 million in Q2. As a percentage of average receivables, non-interest revenue was 9.24%, up from 8.69% in Q2. With some improving trends in the fee-based business, we expect CCRT to meet its full-year 2001 guidance of all other card income, making up at least 8% of average loans. Credit Quality CompuCredit reported Q3 2001 pro forma net charge-offs of 14.6%, unchanged from Q2, but 360 bps higher than the same period in 2000. Two-quarter lagged pro forma net charge-offs were 16.20% in Q3 2001, the lowest level since 14.33% in Q3 2000. Since Q3 2000, two-quarter lagged pro forma net charge-offs spiked to 16.81% in Q4 2000, 18.51% in Q1 2001, and 17.0% in Q2 2001, before declining to current levels. The Q3 more than 60-day managed delinquency rate was 10.9%, a 30-bp increase from 10.6% in Q2, and 210 bps higher than in Q3 2000, at 8.8%. Management stated that it expects charge-offs to remain flat at the 14.8-15.0% level in Q4 2001 and stay flat in 2002, provided there is no change in the current environment. With an improving scenario, management stated that it expects charge-offs to be lower in 2002, but would not give specific guidance. We assume 2001 full-year charge-offs to fall within managements projected area of 15%. Managed Receivables Third-quarter total managed receivables were $1.80 billion, rising 8% from $1.67 billion in Q2. Note that the 8% increase was below internal company guidance of 9-10%. 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. CCRT would need to grow receivables 11%, or 1.4x Q3 levels to achieve full-year guidance. Account Growth And Marketing Spending As the company implemented its plan to purge inactive accounts, total accounts fell 6%, to 2.2 million in Q3, from 2.3 million in Q2 2001. Although the company added 183,000 new accounts in Q3, it also purged 182,000 inactive accounts and had normal attrition of 138,000. CompuCredits purging of inactive accounts is especially significant in light of Providian woes. The company is taking steps to avoid being stuck with too many bad accounts, as in the case of Providian, and is purging these accounts in order to achieve this goal. Management stated that there should not be any significant purging in Q4 2001.

56

Credit Cards 101

Year to date, the company has added 549,000 new accounts. With a projected slowdown in Q4 marketing due to liquidity constraints, we expect the company to come in at the low end of full-year new account guidance of 600,000-800,000 accounts. However, significant voluntary and involuntary attrition have resulted in just a 12% increase in total accounts, to 2.2 million year over year. Third-quarter marketing per new account added was $41.9, down 9% from $46.3 in Q2 to its lowest level since $40.7 during Q3 2000. Balance Sheet CompuCredits cash position continues to decline. At quarters end, total cash on balance sheet was $37.6 million, down from $50.9 million in Q2 and $73.2 million in Q1 2001.

Profitability
Risk-Adjusted Margin Risk-adjusted margin was relatively unchanged from Q2. We estimate that Q3 risk-adjusted margin was 16.20%, decreasing 4 bps from 16.24% in Q2. With projected declines in interest margin in Q4, we expect risk-adjusted returns to come down slightly. Return On Assets And Equity Third-quarter 2001 return on managed assets and equity fell from Q2 levels. Return on average managed assets was 3.4% in Q3, down 20 bps from 3.6% in Q2. Return on average managed equity fell 30 bps, to 13.8% in Q3 from 14.1% in Q2. Per Account Analysis Q3 2000 Net Interest Income Non-interest Income Marketing Net Income Ending Balance per Acct. $170.2 62.7 32.6 50.1 699.0 Q2 2001 $160.3 62.8 13.8 26.2 727.0 Q3 2001 $168.0 72.0 13.7 26.7 834.0

Source: Company data and Wachovia estimates Third-quarter net interest income per average account was $168, 5% higher than $160.3 in Q2 2001. Non-interest income in Q3 rose to $72 per average account, 15% higher than $62.8 in Q2. Marketing spending per average account fell 1%, to $13.7 in Q3 from $13.8 in Q2. However, net income per average account rose 2%, to $26.7 in Q3 from $26.2 in Q2. As a result of 182,000 in inactive account purges, the ending balance per account rose 15% sequentially, to $834 in Q3 from $727.

57

Financial Services/Specialty Finance

Earnings We have lowered our Q4 2001 estimate to $0.27 from $0.30. Our revised 2001 estimate remains at $1.03. The $0.03 decline incorporates a sequential 15-bp increase in charge-offs, another 50-bp decline in margin reflective of product mix, and virtually flat new and total accounts with Q3. We also lowered our 2002 estimate to $1.15 from $1.30. The $0.15 decline incorporates a 15% charge-off ratio stable throughout the year, 21% margin throughout the year, and receivable growth of just 12%. We also assumed new account growth of 224,000, driving a 10% full-year increase in total accounts, to 2.4 million.

58

Credit Cards 101

October 25, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

Capital One Financial Corporation (COF-NYSE)


Rating Change

2
$44.71 $73-36 221.2 9,889.9

Downgrading The Shares, And Lowering Our Target Price And 2002 Estimates
EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.51 0.54 0.58 0.61 $2.24 20.0x $2.24 20.0x 2001 $0.66 0.70 0.75 0.80 $2.91 15.4x $2.91 15.4x E A A A 2002 E $0.79 0.85 0.90 0.96 $3.50 12.8x $3.50 12.8x 2001 Rev. $1,506.0 MM 1,620.0 1,779.0 1,969.0 $6,874.0 MM 2002 Rev. $2,147.0 MM 2,338.0 2,685.0 3,013.0 $10,182.0 MM

Source: Company data and Wachovia Securities estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
Capital One Financial, headquartered in Falls Church, Virginia, offers a variety of credit card and financial services to customers.

$56 181.2 5,318,750 1,100.09 $0.11/0.2%

LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$5,041.0 67.0% 25% 20% 0.8x

Key Points We downgraded COF to Buy from Strong Buy after attending the companys analyst meeting. On October 25, 2001, the company outlined a what-if scenario on a recessions impact on charge-offs. Under such a given scenario, COF outlined that its rate of increase in charge-offs is estimated to be over 2x the industry average, due to seasoning and loan mix issues. While such a delta in charge-offs would still place COF charge-offs below industry averages, the slope of growth we believe increases the beta/risk profile on the stock. On October 25, the company guided to 20% EPS growth in 2002. Accordingly, we have lowered our 2002 EPS estimate to $3.50 from $3.65. We also lowered our 12-month target price to $56 per share from $70, or 16x our revised 2002 estimate.

59

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, or 16x our revised 2002 estimate of $3.50. On its conference call of October 25, the company outlined a what-if scenario on a recessions impact on charge-offs. Under such a given scenario, 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. While such a delta in charge-offs would still place COF charge-offs below industry averages, the slope of growth we believe increases the beta/risk profile on the stock. Because a good portion of Capital Ones portfolio is less than 12 months old and there is limited vintage data available, we believe what-if scenarios are prudent. In a 6% unemployment scenario, Capital Ones charge-offs could increase 72%. Under an 8% unemployment scenario, charge-offs could increase 90%, compared to 50% year-over-year industry increases. This could be unsettling for some investors. The company also stated that a reasonable amount of future growth is expected to come from adjacent products such as auto, unsecured lending, and first- and second-mortgage products, not a business model currently extant at Household International. Accordingly, we believe Household will become a more relevant comparable. HI currently trades at 12x 2002 consensus estimates.

60

Credit Cards 101

October 16, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

Capital One Financial Corporation (COF-NYSE)


Earnings Reported

1
$42.87 $73-36 221.2 9,482.8

Q3 Earnings On Target; We Reiterate Our Strong Buy Rating On The Shares


EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.51 0.54 0.58 0.61 $2.24 19.1x $2.24 19.1x 2001 $0.66 0.70 0.75 0.80 $2.91 14.7x $2.91 14.7x E A A A 2002 E $0.86 0.88 0.91 0.99 $3.65 11.7x $3.65 11.7x 2001 Rev. $1,506.0 MM 1,620.0 1,808.0 2,036.0 $6,971.0 MM 2002 Rev. $2,193.0 MM 2,245.0 2,322.0 2,509.0 $9,269.0 MM

Source: Company data and Wachovia Securities estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
Capital One Financial, headquartered in Falls Church, Virginia, offers a variety of credit card and financial services to customers.

$70 181.2 2,922,850 1,091.12 $0.11/0.2%

LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$5,041.0 67.0% 25% 25% 0.6x

Key Points Capital One reported Q3 2001 results of $0.75, versus $0.58 in Q3 2000, and in line with expectations. Strong receivable growth, strong margin, and stellar credit quality produced the robust Q3 results. While management reiterated its target of 30% EPS growth for 2001, it resisted providing guidance for 2002. As this is the big question currently on investors minds, we believe such guidance, to be provided after the close October 24, will provide the near-term catalyst for the stock. We simply do not know managements inclination on guidance. Suffice it to say that the range will be 20-30%. As this EPS target dwarfs much of the rest of the growth in other sectors, we believe Capital One stock, at roughly 12x (the low end of such guidance), is extremely compelling. We reiterate our Strong Buy rating on the shares of Capital One. Our 2001 EPS estimate remains $2.91. Our 2002 EPS estimate of $3.65 remains a midpoint of the expected range of guidance to be provided next week. Our target price remains $70 per share, 19x our 2002 estimate.

61

Financial Services/Specialty Finance

Q3 2001 Results Capital One reported Q3 results of $0.75 per share, versus $0.58 per share in Q3 2000, and in line with expectations. The quarter reflected extremely strong receivable growth and margin expansion, as well as stellar credit quality. Receivable growth of 59% allowed the company to end the quarter at $38 billion. Accounts grew 36%, totaling more than 40 million at the end of the quarter. Revenue per account expanded during Q3, as the company earned spread income on higher average balances per account. At the end of Q3, the average balance per account totaled $959, up 17% annually and 4% sequentially. We expect such trends to continue, as the company gains a greater share of revenue from revolving balances. Non-interest income grew to $853 million, up 38% annually and 7% sequentially. Management stated that non-interest income as a percentage of net revenue should decline from Q3 levels of 48%, as the company focuses more on growing balances in superprime and less on growing the number of accounts. Credit quality ratios remain at best in industry levels. For the quarter, charge-offs as a percentage of average managed receivables totaled 3.92%, down sequentially from 3.98%, and up slightly from year-ago levels. This is remarkable, in our view, given that industry average charge-offs are currently roughly 6%. Delinquency trends ticked up sequentially, to 5.2% from 4.9% in Q2, but on a year-over-year basis delinquencies were actually down, though only slightly. Due to seasonality, it is more appropriate to judge delinquency trends on a year-over-year basis. However, management stated during the conference call that it expected charge-offs and delinquencies to move higher over the next 12 months. Accordingly, our estimates assume an annual charge-off rate of 5% for 2002, a 25% increase in losses year to year. As Visa is currently estimating just a 17% increase in bankruptcies, we believe our charge-off estimate going into 2002 is conservative.

Capital One Acquires PeopleFirst During Q3


Capital One announced it had agreed to acquire privately held PeopleFirst for 3.7 million shares or $158.3 million, based on a recent average closing price of $42.80. PeopleFirst will become a wholly owned subsidiary of Capital One and after the deals completion, the current senior team at PeopleFirst should continue to manage its operations. This marks the companys second acquisition of an auto lender, the first being the 1998 acquisition of Summit Acceptance Corporation. PeopleFirst should provide Capital One an entry into the superprime auto loan market, a segment the company did not previously participate in due to difficult economics. PeopleFirst Inc. PeopleFirst is the nations largest online auto lender, focusing on providing low rate loans for new and used cars, as well as motorcycles mainly through the Internet. Privately held, the company was founded in 1995 and currently has 270 employees based in San Diego, California. The company emphasizes originating loans directly to the customer through virtually any motor vehicle dealer. According to Capital One, PeopleFirst either securitizes the loans it originates or sells them as whole loans to partners such as Household Auto Finance, a division of Household international. Of the 1.9 billion in loans originated since 1997, the company has securitized $750 million and has sold the remaining $1.15 billion to its partners.

62

Credit Cards 101

PeopleFirst has strategic partnerships with American Express, Autoweb.com, Edmunds.com, E-Trade Bank, Kelley Blue Book, Lending Tree.com, Mail Boxes Etc., and the National Automobile Dealers Association. Impact On Capital One Capital One has agreed to pay 3.7 million shares of company stock to the owners of PeopleFirst at the closing price of the day the deal is complete, scheduled for mid-October. Capital One intends to increase its managed receivable by $750 million, adding to its $1.8 billion in securitized auto loans, bringing total managed receivables to $36 billion, based on Q2 statistics. The acquisition should give Capital One a full spectrum across all markets in auto lending: subprime, prime, and superprime. Cost The acquisition cost roughly 21% of the loan portfolio based on $158 million purchase price relative to $750 million in managed loans. From conversations with other auto finance companies, it appears that Capital One paid a premium for PeopleFirsts business. Because PeopleFirst is a superprime lender, net-interest margin is razor thin--possibly just 2-3%. Credit Quality The superprime business of PeopleFirst should improve the credit quality of Capital Ones auto finance portfolio, which was predominantly subprime. Charge-offs on the companys 1999 public master trust (the oldest available) were 3 bps. For comparison, we looked at other issuers with public master trust data of similar vintage. Charge-offs at Capital One were 11.71% on their Summit 1998 A public trust. PeopleFirst could be an enormous improvement in credit quality for Capital One. Charge-offs at WFS Financial were 3.09% on the companys 1999-A public master Trust. WFS is considered near prime. Chase had charge-offs of 91 bps on its 1998 public master trust, which is considered prime and superprime. 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 applicants credit risk; versus relying solely on a dealership network to originate loans that can possibly lead to adverse selection. Portfolio Growth As previously mentioned, this is Capital Ones second auto finance acquisition. 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). 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. Capital One has expressed to us that its strategy is to seek the most highly profitable opportunities, regardless of sector. The company believes that diversification is also a plus. According to the company, the auto finance and non-U.S. card business is growing faster than the domestic card business. This is to be expected, as it is well known that competition and pricing for card portfolios are extremely high. The auto finance market is a highly fragmented, relatively unsaturated avenue through which Capital One can explore and possibly enjoy high loan growth.

63

Financial Services/Specialty Finance

64

Credit Cards 101

This page intentionally left blank. .

65

Financial Services/Specialty Finance

November 09, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

MBNA Corporation (KRB-NYSE)


Company Note

1
$31.50 $40-23 878.0 27,657.0

Wachovia Hosts Meeting With MBNA; We Reiterate Our Strong Buy Rating Management Stresses Consistency In Earnings Per Share
EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.28 0.34 0.43 0.48 $1.54 20.5x $1.54 20.5x 2001 $0.35 0.43 0.54 0.61 $1.93 16.3x $1.93 16.3x E A A A 2002 E $0.43 0.53 0.64 0.72 $2.33 13.5x $2.33 13.5x 2001 Rev. $2,566.0 MM 2,845.0 3,121.0 2,919.0 $11,451.0 MM 2002 Rev. $3,002.0 MM 3,068.0 3,290.0 3,510.0 $12,871.0 MM

Source: Company data and Wachovia Securities estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
MBNA Corporation, headquartered in Wilmington, Delaware, is a bank holding company for MBNA America Bank. Through the bank, MBNA also offers credit cards, consumer loans, insurance, and deposit products focused on the affinity market.

$46 647.0 3,258,000 1,120.31 $0.36/1.1%

LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$6,090.0 47.4% 19% 25% 0.7x

Key Points We hosted an investor day with MBNA on Friday, November 9, 2001, at which the company addressed its extremely optimistic outlook for 2002. Management stressed consistency in earnings. Over the past 43 quarters, MBNA has delivered in excess of 20% growth in earnings per share. We remain confident in MBNAs ability to deliver 20% growth in earnings per share in 2002. While notable peers have stumbled and the market appears saturated, we believe MBNA will prevail as a dominant market share leader, due to its scale and strong liquidity advantage over the competition. The company has a clear advantage as the liquidity leader of its peers and is actually in a position of excess liquidity. Since September 11, the company has executed roughly $3.25 billion in asset-backed security sales. MBNAs credit quality should continue to outperform industry averages. We expect MBNAs charge-offs to remain close to 5% over the next couple of quarters, clearly outperforming industry-average charge-offs, which are well in excess of 6%. Currently, MBNA has a significant pricing advantage over its monoline peers within the assetbacked securities market. We believe such a liquidity premium should translate into a premium multiple in the companys stock valuation. Accordingly, we reiterate our Strong Buy rating on the shares and $46 target price, 19x our 2002 estimate.

66

Credit Cards 101

Discussion We hosted an investor day at MBNA on November 9, 2001, at which the company addressed its extremely optimistic outlook for 2002. The company stated that it believes the driver behind its present and future success lies in its simplicity. MBNA characterizes itself as a lending company. A full 80% of its gross revenue comes from interest income. It has never relied on fee-based products and has stayed away from the underserved market. This approach has positioned the company as the leading monoline issuer, delivering consistent growth in earnings and receivables while keeping charge-offs below industry levels. As a result, the asset-backed market has rewarded the company with the lowest cost of funds relative to its credit card peers. Liquidity MBNA continues to be the leader among the card issuers in the area of liquidity. After the attacks of September 11, the company came to market only nine days later and completed a three-year $1 billion securitization. Management stated that this deal was upsized to $1 billion from $750 million. Actually, the demand for MBNAs securities at the time of the issuance was in fact as strong as $2.5 billion. Because the company has achieved this lowest cost of funds advantage, combined with 95% of its portfolio being fixed, its margin can continue to widen through Q4. Retail deposits are another source of funds the company can access, and MBNA currently has a retail deposit base of $18.5 billion. MBNA maintains a 15% risk-based capital ratio, 500 bps above the required 10%. The company has 85% of its securitized loans rated AAA, with A and BBB ratings accounting for only 7.5%, respectively. Direct Mail Addressing concerns regarding the current state of direct mail, MBNA has designed a new foldover solicitation with an 800 number on the outside. This strategy was created to mitigate current fears regarding opening mail. The company stated that it will continue to send direct mail into December 2001, stating it already sent 70 million pieces in October and mailing to remain above average in November and December. As of Q2 2001, MBNA was the fifth-largest mailer, sending 89 million solicitations. However, in light of Providians difficulties, MBNA may be capitalizing on this opportunity and could move up in the rankings. Affinity Program MBNA continues to expand its hallmark affinity business. Currently, the company has affinity relationships with 50% of the total college and university market, amounting to about 650 relationships. MBNA stays committed to this strategy by competing for and winning the largest college and university relationships. Management shared with us that several years ago intense competition existed in the college and university market among credit card issuers. Some competitors signed contracts giving the college or university $5-8 million up front. However, as these contracts expire, the colleges and universities are no longer getting these signing bonuses and they are displeased with the poor service they received. MBNA is now going after these colleges and universities that have fallen by the wayside and is signing them. The company has also had success with its professional affinity programs. MBNA currently has a $12.5 billion loan portfolio from such relationships. As a result of its success in the affinity and financial institutions business, the company expects to grow accounts by 9-10 million this year.

67

Financial Services/Specialty Finance

October 11, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

MBNA Corporation (KRB-NYSE)


Company Note

1
$31.07 $40-23 878.0 27,279.5

Stellar Q3 Results MBNA Remains A Top Sector Pick


EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.28 0.34 0.43 0.48 $1.54 20.2x $1.54 20.2x 2001 E $0.35 A 0.43 A 0.54 0.61 $1.93 16.1x $1.93 16.1x 2002 E $0.43 0.53 0.64 0.72 $2.33 13.3x $2.33 13.3x 2001 Rev. $2,566.0 MM 2,845.0 2,755.0 2,919.0 $10,893.0 MM 2002 Rev. $3,002.0 MM 3,068.0 3,290.0 3,510.0 $12,871.0 MM

Source: Company data and First Union Securities, Inc. estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
MBNA Corporation, headquartered in Wilmington, Delaware, is a bank holding company for MBNA America Bank. Through the bank, MBNA also offers credit cards, consumer loans, insurance, and deposit products focused on the affinity market.

$46 647.0 3,359,770 1,097.43 $0.36/1.1%

LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$6,090.0 47.4% 19% 25% 0.6x

Key Points MBNA reported Q3 2001 results of $0.54 per share versus $0.43 per share last year, in line with our estimate and $0.01 better than Street consensus. Strong margin expansion more than offset rising charge-offs, resulting in one of the highest risk-adjusted margin quarters in recent history. Risk-adjusted margin for Q3 was 8.7%. The net interest margin increased to 8.57%, fees increased to $1 billion, and net charge-offs were 4.90%. Organic receivable growth of 9% was consistent with the companys organic receivable growth one year ago, resulting in total managed loans of $92.6 billion at the end of Q3. Consumer spending was extremely strong during Q3 2001, remarkable given the slowdown in consumer spending after the attack of September 11. Consumer spending totaled $36 billion, up 14% from year-ago levels. Consumer spending per average account was $5,500, 2% higher than 2000 levels of $5,400, and flat from Q2 levels. Credit quality remained extremely stable for this low beta company. Charge-offs and delinquencies remained well below industry averages. We reiterate our Strong Buy rating on the shares of MBNA with a $46 target price per share, 19x our 2002 estimate. Our EPS estimates remain $1.93 and $2.33 for 2001 and 2002, respectively.

68

Credit Cards 101

Q3 2001 Results MBNA reported Q3 earnings per share of $0.54 versus $0.43 in Q3 2000, in line with our expectations and $0.01 better than the Street consensus. The quarter was highlighted by robust cardholder spending and continued strength in net interest margin. Managed Receivables Managed receivables at quarters end were $92.6 billion, up $2.2 billion from Q2 2001, and up 9.3% year over year, from $84.6 billion. The company continued to grow its portfolio despite the difficult economic and industry specific conditions in Q3. During the first nine months of 2001, the company added 7.1 million accounts and 329 new affinity groups. Interest Margin Third-quarter managed net interest margin was 8.57%, up 147 bps from 7.10% in 2000, and 24 bps from 8.33% in Q2 2001. 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. Non-Interest Income Non-interest revenue was strong in Q3, rising 29% year over year, to $1 billion from $774 million in Q3 2000. Sequentially, non-interest income also posted solid gains, rising 16% from $864 million in Q2 2001. MBNA cardholder spending remained strong in the quarter, posting $35.9 billion in sales and cash advance volume in Q3, compared to $31.4 billion in Q3 2000, an increase of 14% year over year. On a per average active account basis, cardholders spent $5,500, growing 2% from $5,400 in Q3 2000 and flat from Q2 2001. The company stated that spending in the weeks following the September 11 attacks slowed consistent with its own consumer spending habits, which was consistent with overall consumer spending trends. However, in the past few weeks, consumer spending has rebounded to pre-September 11 levels. Credit Quality Third-quarter managed net charge-offs were 4.90%, up 102 bps from 3.88% in Q3 2000. On a sequential basis, net charge-offs were up 8 bps, from 4.82%. Management commented that charge-offs should stabilize at Q3 levels. Note, industry average charge-offs remain at roughly 6%. Delinquencies were 4.23% in Q3 2001, 42 bps lower than the 4.65% in Q3 2000 and 34 bps lower than 4.57% in Q2 2001. However, because of the September 11 attacks and the ensuing difficulties for some cardholders in receiving their statements on time, the company postponed current accounts from becoming delinquent if payment was not punctual. MBNA estimates that without these measures, delinquencies would have been between 4.85% and 4.95%. The company expects delinquencies to return to normal levels seen in the past few months in Q4.

69

Financial Services/Specialty Finance

Profitability Analysis
Risk-Adjusted Margin Assisted by gains in net interest margin, Q3 risk-adjusted margin was 8.69%. This was 95 bps higher than the 7.74% in Q3 2000 and a 76-bp improvement from 7.93% in Q2 2001. Return On Average Managed Equity And Assets Return on average total assets was 4.58% in Q3, 20 bps higher than 4.38% in Q3 2000 and 70 bps higher than the 3.88% in Q2 2001. Return on average total equity was 26.49%, 110 bps lower than 27.56% in Q3 2000, but up 420 bps from 22.33% in Q2 2001.

70

Credit Cards 101

This page intentionally left blank.

71

Financial Services/Specialty Finance

October 17, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

Metris Companies Inc. (MXT-NYSE)


Earnings Estimates Revised Down

2
$22.78 $39-19 99.8 2,273.4

Q3 2001 Results Beat Expectations Lowering Our 2002 Estimate To Reflect More Conservativism
EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.55 0.53 0.52 0.52 $2.11 10.8x $2.11 10.8x 2001 $0.57 0.63 0.70 0.68 $2.57 8.9x $2.57 8.9x E A A A 2002 E $0.71 0.75 0.78 0.81 $3.05 7.5x $3.05 7.5x 2001 Rev. $530.0 MM 599.0 637.0 659.0 2,425.0 MM 2002 Rev. $681.0 MM 712.0 736.0 766.0 $2,895.0 MM

Source: Company data and Wachovia Securities estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
Metris Companies, based in St. Louis Park, Minnesota, is an information-based direct marketer of consumer credit products and feebased services, as well as extended service plans focused on the un-banked market.

$40 3.1 2,353,910 1,077.09 $0.04/0.1%

LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$451.0 29.0% 27% 25% 0.4x

Key Points Metris reported Q3 earnings per share of $0.70 versus $0.52 in Q3 2000 and $0.02 better than both our estimates and Street expectations. Metris provided guidance for 2002, stating it expects to earn between $3.00 and $3.05 next year. Accordingly, we have lowered our 2002 estimate to $3.05 from $3.15, to reflect managements more conservative outlook. We do note, however, that we believe our revised estimate will most likely prove extremely conservative. The company also revised FY2001 guidance upward, stating that earnings per share will be between $2.57 and $2.60, up from previous guidance of $2.54-2.59. Our 2001 estimate remains $2.57. Metris reported strong Q3 2001 results, ahead of expectations due to strong receivable growth margin expansion. Receivable growth exceeded our expectations, as managed receivables grew 29%, to $11.0 billion. Net interest margin improved 10 bps sequentially and 100 bps year over year, to 14.2% Managed net-charge offs improved in Q3 2001, to 10.7% from 10.9% in Q2 2001. The company expects net charge-offs to tick up next year, stating to expect between 10% and 11% in Q4, but is expecting the range for 2002 to increase to 10.5-11.5%. We maintain our Buy rating on the shares with a $40 target price per share, 13x our 2002 estimate.

72

Credit Cards 101

Q3 2001 Results Metris reported Q3 earnings per share of $0.70, versus $0.52 in Q3 2000. Results were above both our expectations and Street consensus by $0.02. The quarter was driven by strong growth in receivables of $2.5-11.0 billion from $8.5 billion in Q3 2000, achieving 29% year-over-year growth, net interest margin rising to 14.2%, 100 bps higher than the 13.2% in the same period in 2000, 26% growth in non-interest income, to $165.7 million from $131.5 million in Q3 2000, and overall higher net revenue per account of $542, 20% higher than the $452 in Q3 2000. Metris has revised FY2001 earnings estimates to between $2.57 and $2.60 from previous guidance of $2.54-2.59, representing 30% growth in operating earnings year over year. Managed Receivables Third-quarter managed receivables grew to $11 billion, a 29% increase from $8.5 billion in Q3 2000. Factors contributing to the growth were continued spending by Metris cardholders, carrying an average balance of $2,300 per account during Q3, an increase of 18% from Q3 2000. Inclusive in the growth was also a small portfolio purchase, Provident Banks portfolio, which added $160 million in receivables. On its conference call, management cited the exit of the partially secured credit card business as a factor in the rising average balance amounts. Management also stated that it has agreed to buy another card portfolio with $130 million in receivables; however, terms were not disclosed. Account Growth Total accounts in Q3 grew to 4.8 million, 10% higher than the 4.4 million in Q3 2000. The company added 380,000 accounts during the quarter, including 130,000 acquired from the Provident Bank acquisition. Organic growth was in line with stated goals of 250,000 new accounts per quarter. Net Interest Income Third-quarter managed net interest margin was 14.2%. This was a 100-bp increase over 13.2% in the same period in 2000. Net interest income rose 41% in Q3, to $395 million from $280 million in Q3 2000. The company benefited from a lower cost of funds of 5%, a 240-bp decline from 7.4% for the same period in 2000. Net interest margin is expected to stay in the range of 13.5-14.0% for Q4. Non-Interest Income Non-interest income for Q3 2001 was $242 million, 22% higher than the $198 million in Q3 2000. Metris stated that it waived $2 million in late fees for its customers in the New York and Washington, D.C. areas following the events of September 11. However, this does not account for the weakness in non-interest income when viewed relative to average managed loans. As a percentage of average managed loans, enhanced revenue was only 3.24%, its lowest level since Q4 1999. Although Metris reported a 25% increase in enhanced services revenue, to $86.2 million in Q3 from $68.8 million in Q3 2000, it appears as if revenue is slowing. Total enrollments are down 325,000, to 874,000 in Q3 2001 from 1,199 in Q3 2000. In addition, active members at period end also declined, falling 7%, to 5.6 million in Q3, from 6.0 million in Q3 2000. Last, another sign that the fee business is slowing is the decrease in deferred revenue. In Q3, deferred revenue was $176 million, 10% lower than the $194 million in Q3 2000. The company stated in its press release that it expects enhancement service revenue to grow 25-35% in Q4 2001. Given that

73

Financial Services/Specialty Finance

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

74

Credit Cards 101

Credit Quality Managed net charge-offs in Q3 2001 were 10.7%, improving 20 bps from 10.9% in Q2 2001, but 90 bps higher than 9.8% for the same period in 2000. The company expects net charge-offs in the 10-11% range in Q4. Management guided its range of net charge-offs slightly higher for 2002, stating to expect between 10.5% and 11.5% in 2002. Third-quarter managed delinquencies were 8.5%, rising 30 bps from 8.3% in Q3 2000, and 17 bps higher sequentially, from 8.33% in Q2 2001. The provision for loan losses in Q3 was $879.5 million, a 21% increase from the 2000 allowance of $729.3 million, and 6% higher than the $826.1 million in loss allowance in Q2. Profitability Analysis Risk-adjusted margin on average managed loans was 13.25%, down 21 bps from 13.46% in Q3 2000, and down 14 bps from 13.40% in Q2 2001. Although Metris experienced improvements in net interest margin and lower charge-offs than in Q2 2001, weakness in non-interest income, specifically enhanced fee revenue led to a lower risk-adjusted margin. Management stated that fee income is relatively volatile from quarter to quarter and that Q4 fee income should resume to more normalized levels. Return On Average Managed Assets And Average Equity Third-quarter return on average managed assets was 2.6%, 40 bps higher than 2.2% in Q3 2000 and 10 bps higher from Q2 2001. Management stated that new accounts added to the portfolio are generating higher profit than existing accounts and expect this trend to continue. Return on average equity was also higher, rising 335 bps, to 26.80% from 23.45% in Q3 2000, and 87 bps higher than the 25.93% in Q2 2001. Per Account Analysis On An Average Basis Q3 2000 Net Interest Income Non-interest Income Marketing Net Income Ending Balance Per Acct.
Source: Company data

Q2 2001 $313.0 214.1 45.3 55.3 2,205

Q3 2001 $336.4 206.0 35.7 60.2 2,297

$264.8 187.6 34.7 46.2 1,944

2002 Guidance For FY2002, Metris provided guidance for the key drivers in their business. New account growth is expected to be between 200,000 and 250,000 per quarter. Managed loans are expected to grow 10-15% in 2002 from 2001 levels. The company expects net interest margin to fall within the

75

Financial Services/Specialty Finance

13.75-14.25% range and expects fee income to experience 5-10% growth. Charge-off rates are expected to be between 10.5% and 11.5%. Metris expects 700,000-750,000 new enrollments per quarter in their enhanced services business and expects revenue to grow 15-20% next year. The company expects to earn between $3.00 and $3.05 in 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. As a result, Metris appears to be assuming a U-shaped recovery for late 2002 and feels confident in the companys prospects for 2002.

76

Credit Cards 101

October 18, 2001 Rating:


Price: 52-Wk. Rng.: Shares Out.: (MM) Market Cap.: (MM)

Providian Financial Corporation (PVN-NYSE)


Rating Downgrade

4
$12.40 $65-12 295.0 3,658.0

That's All Folks! CEO Resigns 2002 Profitability Seriously Questioned, Company Likely To Sell Assets
EPS
FY (Dec.) Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) Full FY FY P/E Full CY CY P/E 2000 A $0.60 0.64 0.78 0.73 $2.73 4.5x $2.73 4.5x 2001 $0.78 0.79 0.20 0.00 $1.76 7.0x $1.76 7.0x E A A A 2002 E $0.00 0.00 0.00 0.00 $0.00 NM $0.00 NM 2001 Rev. $1,684.0 MM 1,765.0 1,716.0 1,737.0 $6,901.0 MM 2002 Rev. $1,714.0 MM 1,737.0 1,807.0 1,900.0 $7,159.0 MM

Source: Company data and Wachovia Securities estimates

Target Price: Float: (MM) Avg. Daily Vol.: S&P 500: Div./Yield: Company Description
Providian Financial Corp., headquartered in San Francisco, California, is a consumer lender that offers a range of lending products, including credit cards, home equity and secured cards, and a variety of fee-based products and services.

NE 277.0 5,746,400 1,068.61 $0.20/0.4%

LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Grth. Rate: CY 2001 Est. P/E-to-Grth.:

$1,129.0 32.0% 9% 15% 0.5x

Key Points Providian reported Q3 2001 earnings per share of $0.20 versus $0.68 in Q3 2000, in line with previously lowered guidance of $0.19-0.21 per share. In a prerelease, Providian cited efforts to strengthen its balance sheet and worse-thananticipated credit quality as factors in the shortfall. The CEO announced his resignation and will officially step down after an externally sourced replacement is found. The only relevant issue at this point for the company is funding. With an extremely high beta on losses, as well as pressure on net interest and fee income, the cost of funds is certain to rise. How strained Providians access becomes should be the only salient question to investors. It is likely with this much uncertainty in the future earnings of the company and more important, significant doubt placed on the companys underwriting, that the company will put its assets up for sale. We have lowered our estimates for Q4 2001 to $0.00 from $0.82, our FY2001 estimate to $0.00 from $3.20, and our 2002 estimate to $0.00 per share from $3.25. We have no confidence in these estimates, as they could prove too aggressive. We have downgraded our rating on the shares of Providian to Underperform from Market Perform.

77

Financial Services/Specialty Finance

Providian Financial reported Q3 earnings per share of $0.20 versus $0.68 in Q3 2000, and in line with previously lowered guidance of $0.19-0.21 per share. The company cited three primary factors that resulted in the quarters weakness--actions taken to strengthen the balance sheet in anticipation of continued weak credit conditions, lower-than-expected fee and finance charge income in September, and higher-than-expected credit losses in September. The company is suffering from its failure to penetrate the superprime segment. Stuck in the underserved market, it is finding that losses are growing faster than loans. In efforts to make the best of an extremely difficult situation, the company is repositioning its strategy to focus on its middle-market business, as well appointing J. David Grissom as chairman and beginning a search for a new CEO while Shailesh Mehta stays on temporarily. Too Little, Too Late On September 4, 2001, Providian announced it was reducing 2001 guidance for loan growth to 2931% from previous guidance of 32-35%. At that time, management stated that the company missed loan-growth targets in the superprime sector by $1 billion. This has cost the company dearly. Unlike Capital One, which saw the benefits of the superprime market early on, Providian is caught with a mostly underserved portfolio during an economic downturn. It is possible a rift has been created between the superprime and subprime market by the U.S. economic slowdown, and exacerbated by the events in the past month. MBNA and Capital One have both reported that quarterly charge volume has been healthy, despite a complete fall-off in the weeks following the attack of September 11. However, Providian has been reporting that its customer spending has softened. It is possible that in periods of layoffs and economic uncertainty, the lower-income, higher-indebted consumer is hit harder than the middle-to-upper income customer with a healthy balance sheet.

Q3 2001 Results
Managed Receivables Managed receivables grew $1.8 billion in Q3 2001, to $32.3 billion, a 31% increase compared to $24.5 billion in Q3 2000. This was largely due to an increase in average balance per account off a greater number of accounts. Average balance per account rose 7% year over year, to $1,743 in Q3, from $1,637 in Q3 2000. Account Growth Providian grew accounts by 23% since Q3 2000, rising to 18.5 million in Q3 2001 from 15.0 million in Q3 2000. The company added 800,000 net new accounts during Q3. Net Interest Income The Q3 managed net interest margin was 12.94%, a 4-bp increase from 12.90% in Q3 2000. Providian stated that, exclusive of its recognition of uncollectible accrued finance charges, net interest margin would have been 13.75%. Managed net interest income for Q3 was $1.0 billion, 33% higher than $761 million in Q3 2000. Non-Interest Income Third-quarter non-interest income was $702 million, 13% higher than the $620 million in Q3 2000.

78

Credit Cards 101

Credit Quality Managed net charge-offs for Q3 were 10.77%, rising 316 bps from the 7.61% in Q3 2000 and 48 bps from 10.29% sequentially. Management has stated its expects losses of slightly more than 12% in Q4 2001, due to older vintages being stressed by a macro environment that was worse than expected. Managed delinquencies were 8.66% in Q3, a 195-bp increase from the 6.71% in Q3 2000, and a 62-bp increase sequentially from 8.04%. However, Providian noted that without the $85 million charge to recognize the uncollectible portion of accrued finance charges, managed delinquencies would have risen to 8.90%. The Q3 provision for losses rose to $995.5 million, increasing 100% from $497.3 million in Q3 2000, largely a result of the incremental provision of $186 million during Q3 to strengthen its balance sheet. Allowance as a percent of on-balance-sheet loans rose to 12.0%, increasing 188 bps from 10.12% for the same period in 2000. Profitability Analysis Risk-adjusted margin for Q3 2001 was 11.88%, falling 474 bps from 15.89% in Q3 2000. Sequentially, risk-adjusted margin fell 264 bps from 13.79%. Return On Average Managed Asset And Average Equity Third-quarter managed return on average assets was 0.62%, a 230-bp decrease from 2.92% in Q3 2000. This is reflective of the worsening loan quality at the company. Similarly, return on equity experienced an extreme drop in Q3. Managed return on equity was 9.4%, falling 38.09% from 47.49% in Q3 2000. Per Account Analysis On An Average Basis Q3 2000 Net Interest Income Non-interest Income Marketing Expense Net Income Ending Balance Per Acct. Cost Per Net New Acct.
Source: Company data

Q2 2001 $221.2 184.5 34.6 53.4 1,723 251.2

Q3 2001 $223.9 155.2 39.6 9.7 1,743 223.8

$210.7 171.7 38.4 55.6 1,637 126.2

Net interest per average account increased 6%, to $223.9 in Q3 2001 from $210.7 in Q3 2000. Third-quarter non-interest income fell 10%, to $155.2 from $171.7 in Q3 2000. Providian spent $39.6 in marketing per average account in Q3, a 3% increase from $38.4 in Q3 2000. Thirdquarter net income per average account fell to $9.7, an 83% decline from $55.6 in Q3 2000.

79

Financial Services/Specialty Finance

Ending balance per average account rose 6%, to $1,743 in Q3, compared to $1,637 for the same period in 2000. Cost per net new account grew to $223.8 in Q3 from $126.2, a 77% increase year over year.

80

Credit Cards 101

This page intentionally left blank.

81

Financial Services/Specialty Finance

November 27, 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. Providian Financial Corporation Ticker AXP COF CCRT KRB MXT PVN Rating 3 2 3 1 2 4 Price $34.58 $54.45 $8.11 $33.80 $22.56 $3.56 FY EPS 2001E 2002E $1.14 $2.91 $1.03 $1.93 $2.58 $1.76 $1.75 $3.50 $1.15 $2.33 $3.05 $0.00 CY P/E 2001 2002 30.3x 18.7x 7.8x 17.5x 8.7x 2.0x 19.8x 15.6x 7.0x 14.5x 7.4x NA

Source: Company data and Wachovia Securities estimates

Key Points Master trust losses at the ten issuers we follow (MBNA, Capital One, American Express, Citigroup, Chase, Metris, Providian, Fleet, Discover and First USA/Bank One) were an average of 19% higher year over year, the lowest increase since June. Sequentially, losses rose at six of the ten issuers, but fell 8 bps overall. Delinquencies, a leading indicator to losses, were an average of 9.3% higher year over year. This represents the smallest increase since January. Sequentially, delinquencies rose at six of the ten issuers we follow and rose an average of 5 bps overall. Portfolio yields fell, on average, 5.1% year over year, but rose sequentially at eight of the ten issuers we follow by an average of 82 bps. Payment rates rose an average of 2.0% year over year and 109 bps sequentially. A rise in payment rates is an indicator of improving future credit quality. As so much of the health of the U.S. economy is currently predicated on the state of the U.S. consumer, bankruptcy reform is now being perceived by many in Washington as being anticonsumer. We believe that delaying this legislation will result in lower charge-offs for the near term. Credit quality may be improving, as year-over-year increases in both losses and delinquencies appear to be slowing relative to data from the past several months. However, in absolute terms, a 19% increase in losses and a 9% increase in delinquencies year over year are still cause for concern. The static pool data, sourced from Bloomberg and Moodys and updated monthly is, in our opinion, the best indicator of future quarters performance of credit card companies.

82

Credit Cards 101

Discussion
Charge-Offs MBNA. Charge-offs at MBNA were 4.97% in October, rising 6 bps from 4.91% in September and up 27.8% compared to the same period in 2000. In May, charge-offs reached a peak of 5.0% and have remained close to that level since. Capital One. Losses at Capital One improved 8 bps in October, falling to 4.18% from 4.26% in September, but were 63.3% higher year over year. Charge-offs have been rising in the Capital Ones master trust, reaching a three-year high of 4.26% in September, due to the company rebalancing the credit quality of its on- and off-balance-sheet portfolios. American Express. Charge-offs at American Express rose 49 bps in October, to 6.41% from 5.92% in September, and rose 18.1% compared to the same period in 2000. This months yearover-year comparison is the highest in at least a year. Citigroup. Charge-offs at Citigroup were 4.90% in October, rising 26 bps from 4.64% in September, and are up 30.3% year over year. Chase. October losses at Chase were 5.82%, 29 bps lower than the 6.11% in September, and down 0.3% year over year. Chases master trust was the only one to see a decrease in losses year over year of the ten companies we follow. Metris. Losses at Metris fell 165 bps, to 12.16% in October from 13.81% in September, but were nearly flat year over year. In light of September 2001 losses being 24% higher year over year, Octobers performance may be due to volatility in the trust performance and not a vast improvement in credit quality. Providian. Losses at Providian rose 30 bps, to 8.04% in October from 7.74% in September, and were 26.2% higher year over year. Providian is having difficulty with certain master trust series and, according to the Q3 10k, the companys 1998-1 master trust has experienced a payout event due to a credit rating downgrade by Moodys. Fleet. Charge-offs at Fleet were 6.31% in October, improving 59 bps from 6.90% in September, but were 6.2% higher year over year. However, this was the smallest year-over-year increase in charge-offs since March 2001, when losses increased 1.3% annually. Discover. October losses in Discovers master trust were 6.02%, 31 bps higher than the 5.71% in September, and 6.7% higher year over year. First USA/Bank One. October losses at First USA/Bank One were 6.48%, 36 bps higher than the 6.12% in September and up 12.1% year over year. Delinquencies MBNA. Delinquencies were back to August levels in October, after the grace period the company granted certain customers in the month of September. Delinquencies were 4.92%, 67 bps higher than the 4.25% in September and almost flat year over year. MBNA was the only company we follow with year-over-year delinquencies remaining unchanged.

83

Financial Services/Specialty Finance

Capital One. Delinquencies at Capital One were 5.50% in October, 16 bps lower than the 5.66% in September, but up 40.7% compared to the same period in 2000. Due to portfolio rebalancing, year-over-year comparisons of delinquencies are much higher. American Express. American Express had October delinquencies of 3.47%, 17 bps higher than the 3.30% in September and 13% higher year over year. Citigroup. Delinquencies fell 28 bps in October, to 3.63% from 3.91% in September, and were 4.3% higher compared to the same period in 2000. This was the slowest increase since February 2001, when delinquencies rose 4.1% annually. Chase. October delinquencies at Chase were 4.71%, 29 bps higher than 4.42% in September and 5.1% higher year over year. Metris. Master trust delinquencies at Metris were 8.56% in October, 32 bps lower than the 8.88% in September, and only 2.3% higher year over year. This was the smallest annual change in at least a year. Providian. Delinquencies at Providian rose 12 bps, to 5.04% in October from 4.92% in September, and were 21.45% higher year over year. Fleet. Delinquencies at Fleet fell 30 bps in October, to 3.43% from 3.73% in September, and fell 15.3% year over year. This was the largest year-over-year decrease of the ten companies we cover. Discover. Discover delinquencies fell to 7.39% in October from 7.21% in September, an 18-bp decline, but increased 11.8% year over year. First USA/Bank One. Delinquencies in October were 4.53%, 13 bps higher than the 4.40% in September, and were 10% higher year over year. Portfolio Yield MBNA. MBNAs master trust yielded 19.16% in October, an increase of 59 bps from 18.57% in September, but fell 2.3% compared to the same period in 2000. Capital One. Capital Ones master trust yielded 23.24% in October, falling 63 bps from 23.87% in September, but improved 4.8% year over year. American Express. American Express master trust yielded 22.29% in October, 172 bps higher than the 20.57% in September, but fell 1.2% year over year. This was the third straight month in which portfolio yield declined year over year. Citigroup. Octobers average yield rose 69 bps, to 15.27% from 14.58% in September, but fell 9.3% year over year. Chase. The average yield on Chases portfolio was 19.03% in October, rising 310 bps from 15.93% in September, but fell 5.9% year over year. Metris. Metris master trust yielded 26.50% in October, 39 bps lower than 26.89% in September, and was down 1.0% year over year. Providian. Providians master trust yielded 18.01% in October, rising 31 bps from 17.70% in September, but was down 18.06% year over year. This was the largest year-over-year decrease in portfolio yield in at least a year.

84

Credit Cards 101

Fleet. Fleets portfolio yield rose 79 bps in October, to 18.27% from 17.48% in September, but fell 11.9% year over year, its largest decrease since June 2001. Discover. Average yield on Discovers master trust portfolio rose 45 bps, to 18.26% in October from 17.81 in September, but fell 4.4% year over year. First USA/Bank One. Average portfolio yield rose 235 bps, to 19.34% in October from 16.99% in September, but fell 1.3% year over year. Payment Rates MBNA. Payment rates at MBNA rose 93 bps in October, to 13.21% from 12.28% in September, and were 3.7% higher year over year. Capital One. October payment rates rose 113 bps, to 14.88% from 13.75% in September, but declined 4.2% year over year. American Express. Payment rates at American Express were 16.06% in October, 83 bps higher than the 15.23% in September and 26% higher year over year. Citigroup. Payment rates at Citigroup were 18.44% in October, 178 bps higher than 16.66% in September, but 5.4% lower year over year. Chase. October payment rates were 15.79%, 273 bps higher than the 13.06% in September and 8.4% higher year over year. Metris. Payment rates in October rose 51 bps in October, to 4.58% from 4.07% in September, but fell 6.5% year over year. Providian. October payment rates at Providian were 58 bps higher, rising to 7.26% from 6.68% in September, but declined 11.8% year over year. Fleet. Payment rates at Fleet were 11.74% in October, 143 bps higher than 10.31% in September and were 5.1% higher year over year. Discover. Payment rates rose 26 bps in October, to 15.38% from 15.12% in September, and were 1.8% higher year over year. First USA/Bank One. Payment rates were 15.35% in October, 176 bps higher than 13.59% in September, and 6.2% higher year over year.

85

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 3.89% 3.88% 3.90% 4.39% 4.38% 4.39% 4.60% 5.00% 4.98% 4.98% 4.93% 4.91% 4.97% COF 2.56% 2.78% 2.60% 2.32% 2.50% 3.00% 4.03% 4.06% 4.18% 3.91% 3.67% 4.26% 4.18% AXP 5.43% 5.45% 5.36% 5.58% 6.10% 6.57% 6.98% 7.20% 6.66% 6.50% 6.61% 5.92% 6.41% Citi 3.76% 3.30% 4.00% 3.29% 4.41% 3.73% 5.14% 6.02% 3.86% 4.01% 4.75% 4.64% 4.90% Chase 5.84% 5.68% 6.76% 6.08% 6.27% 6.54% 6.85% 7.09% 7.07% 6.65% 5.96% 6.11% 5.82% MXT 12.15% 11.40% 11.35% 12.71% 13.52% 13.49% 14.47% 11.83% 13.04% 12.50% 11.97% 13.81% 12.16% PVN 6.37% 5.98% 5.77% 5.99% 6.80% 7.80% 8.75% 8.16% 6.11% 7.75% 8.16% 7.74% 8.04% Fleet 5.94% 5.80% 5.28% 6.75% 5.97% 6.22% 6.91% 7.43% 7.07% 7.94% 7.88% 6.90% 6.31% Discover 5.64% 5.85% 6.20% 5.97% 6.15% 6.08% 5.72% 5.41% 6.34% 6.24% 5.90% 5.71% 6.02% ONE 5.78% 5.51% 5.68% 5.49% 6.51% 5.96% 6.22% 6.80% 6.64% 7.37% 6.08% 6.12% 6.48%

Source: Bloomberg Market Data and Moodys 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 4.94% 4.96% 4.51% 4.69% 4.87% 4.63% 4.80% 4.62% 4.60% 4.76% 4.88% 4.25% 4.92%

COF 3.91% 3.96% 4.06% 4.20% 5.57% 5.37% 5.43% 5.28% 5.30% 5.53% 5.64% 5.66% 5.50%

AXP 3.07% 3.11% 3.04% 3.22% 3.26% 3.37% 3.20% 3.19% 3.21% 3.17% 3.14% 3.30% 3.47%

Citi 3.48% 3.46% 3.67% 4.05% 4.08% 3.98% 3.84% 3.86% 3.79% 3.87% 3.82% 3.91% 3.63%

Delinquency Chase MXT 4.48% 4.68% 4.66% 4.76% 4.78% 4.67% 4.66% 4.64% 4.65% 4.24% 4.39% 4.42% 4.71% 8.37% 8.53% 8.53% 8.92% 9.13% 8.76% 8.33% 8.14% 8.28% 8.60% 8.84% 8.88% 8.56%

PVN 4.15% 4.40% 4.29% 4.55% 4.73% 4.54% 4.55% 4.63% 4.79% 4.86% 4.77% 4.92% 5.04%

Fleet 4.05% 4.07% 4.13% 4.19% 4.30% 4.13% 4.05% 4.03% 3.83% 3.87% 3.86% 3.73% 3.43%

Discover 6.61% 6.77% 6.84% 7.20% 7.31% 7.11% 6.78% 6.26% 6.39% 6.49% 6.74% 7.21% 7.39%

ONE 4.12% 4.32% 4.39% 4.51% 4.50% 4.35% 4.22% 4.33% 4.28% 4.21% 4.24% 4.40% 4.53%

Source: Bloomberg Market Data and Moodys 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 19.62% 19.74% 19.79% 19.75% 19.48% 20.67% 19.61% 19.67% 18.98% 19.52% 19.46% 18.57% 19.16% COF 22.17% 21.20% 21.70% 21.23% 27.50% 27.40% 26.21% 24.61% 23.22% 23.95% 24.34% 23.87% 23.24% AXP 22.57% 22.10% 21.87% 22.01% 23.52% 23.66% 22.45% 22.55% 21.74% 21.96% 22.07% 20.57% 22.29% Citi 16.83% 15.41% 17.12% 16.21% 17.04% 16.83% 16.49% 16.92% 15.30% 15.40% 15.00% 14.58% 15.27% Chase 20.22% 19.06% 19.39% 19.32% 17.39% 19.79% 18.92% 18.64% 17.15% 18.74% 18.80% 15.93% 19.03% MXT 26.78% 27.08% 27.42% 27.68% 29.62% 31.00% 27.46% 27.52% 27.61% 26.23% 27.61% 26.89% 26.50% PVN 21.98% 19.85% 20.22% 21.33% 20.24% 21.60% 19.25% 21.29% 19.57% 18.50% 18.92% 17.70% 18.01% Fleet 20.74% 19.12% 18.98% 19.48% 18.07% 20.88% 19.50% 18.65% 16.93% 18.97% 19.80% 17.48% 18.27% Discover 19.11% 18.68% 18.75% 17.43% 19.20% 18.72% 16.51% 17.41% 16.34% 17.00% 17.21% 17.81% 18.26% ONE 19.60% 17.94% 18.05% 18.25% 16.78% 19.06% 18.10% 17.89% 17.15% 18.97% 19.04% 16.99% 19.34%

Source: Bloomberg Market Data and Moodys 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 12.74% 12.62% 12.21% 13.31% 12.28% 13.40% 12.54% 13.07% 13.06% 13.13% 13.76% 12.28% 13.21%

COF 15.54% 14.95% 14.89% 15.87% 14.27% 14.78% 13.60% 14.81% 15.41% 14.27% 14.66% 13.75% 14.88%

AXP 12.75% 12.72% 12.13% 13.41% 12.43% 18.31% 14.74% 15.66% 14.88% 16.39% 16.53% 15.23% 16.06%

Citi 19.50% 18.95% 18.04% 20.42% 17.78% 20.10% 18.18% 19.66% 19.73% 19.09% 20.47% 16.66% 18.44%

Payment Chase MXT 14.56% 13.84% 13.88% 14.84% 12.70% 14.59% 14.45% 14.72% 14.72% 15.03% 15.47% 13.06% 15.79% 4.90% 4.81% 4.63% 4.77% 4.51% 5.17% 4.77% 4.86% 4.59% 4.43% 4.82% 4.07% 4.58%

PVN 8.23% 6.83% 6.89% 7.21% 6.77% 8.31% 7.46% 7.72% 7.88% 7.30% 7.89% 6.68% 7.26%

Fleet 11.17% 10.63% 10.29% 10.62% 9.71% 11.37% 11.15% 10.99% 10.78% 11.39% 12.11% 10.31% 11.74%

Discover 15.11% 14.99% 14.30% 16.25% 13.95% 15.31% 14.65% 15.09% 14.91% 15.82% 16.01% 15.12% 15.38%

ONE 14.45% 13.40% 13.47% 14.28% 12.73% 14.58% 14.39% 14.27% 13.86% 14.91% 15.47% 13.59% 15.35%

Source: Bloomberg Market Data and Moodys Research

86

Credit Cards 101

Average Master Trust Performance--Past Two Years


Net Charge-Offs
8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0%
`

Delinquencies
6.5% 6.0% 5.5% 5.0%
`

4.5% 4.0%

Source: Bloomberg Market Data and Moody's Research

Source: Bloomberg Market Data and Moody's Research


Payment Rates
13.5% 13.0% 12.5% 12.0% 11.5%

Portfolio Yield
25.0% 24.0% 23.0% 22.0% 21.0% 20.0% 19.0% 18.0% 17.0%
`

11.0% 10.5% 10.0%

Source: Bloomberg Market Data and Moody's Research

Source: Bloomberg Market Data and Moody's Research

* Includes MBNA, Capital One, American Express, Citigroup, Chase, Metris, Providian, Fleet, Discover, First USA/Bank One.

87

Wachovia Securities, U.S. Institutional Sales Offices


Wachovia Securities 7 Saint Paul Street 1st Floor, MD3608 Baltimore, MD 21202 (877) 893-5681 Wachovia Securities 77 West Wacker Drive 29th Floor Chicago, IL 60601 (800) 527-8222 Wachovia Securities 901 East Byrd Street West Tower, 3rd Floor Richmond, VA 23219 (800) 531-6801 Wachovia Securities One Boston Place Suite 2700 Boston, MA 02108 (877) 238-4491 Wachovia Securities 301 South College Street One First Union Center, 8th Floor Charlotte, NC 28288 (800) 346-6616 Wachovia Securities One Market Street Steuart Tower, Suite 1010 San Francisco, CA 94105 (888) 243-5428 Wachovia Securities 12 East 49th Street 45th Floor New York, NY 10017 (800) 876-5670 Wachovia Securities 4440 PGA Boulevard Suite 304 Palm Beach Gardens, FL 33410 (800) 527-7856 Wachovia Securities 3060 Peachtree Road 1 Buckhead Plaza Atlanta, GA 30305 (800) 515-8650

This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. The information in this report has been obtained or derived from sources believed by First Union Securities, Inc. to be reliable, but First Union Securities, Inc. does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of First Union Securities, Inc. at this time, and are subject to change without notice. First Union Securities, Inc., or its affiliates may from time to time provide advice with respect to, acquire, hold, or sell a position in, the securities or instruments named or described in this report.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

Anthony P. Gallo, CFA National Director of Research anthony.gallo@wachovia.com Todd M. Wickwire Director of Institutional Research todd.wickwire@wachovia.com

(410) 625-6319

(410) 625-6393

COMMUNICATIONS
Telecommunication Services-Wireless Jennifer M. Fritzsche (312) 574-5985 Jill A. Desmarais (312) 574-5983 Telecommunication Services-Wireline Frank G. Murphy (804) 868-1123

FINANCIAL SERVICES
Financial Services/Specialty Finance Meredith A. Whithey (212) 891-5040 Douglas C. Sipkin (212) 891-5062 Richard Herr (212) 909-0984

REAL ESTATE/REITS/LODGING
Real Estate/Lodging Jeffrey J. Donnelly, CFA Eric Rothman, CFA (617) 603-4262 (617) 603-4263

HEALTH CARE
Biotechnology Leah Rush Cann David Garrett (212) 891-5088 (212) 909-0969

Multifamily/Health Care/Diversified Stephen C. Swett (212) 909-0954 Christopher Pike, CFA (212) 891-5039 Office and Industrial/Diversified and Specialty Christopher P. Haley (443) 263-6773 Donald Fandetti, CFA (443) 263-6537

CONSUMER & BUSINESS SERVICES


Apparel Retailing Joseph Teklits Lyn Rhoads Walther Jessica K. Schmidt (410) 625-6340 (443) 263-6536 (443) 263-6442

Biotechnology/Genomics/Life Sciences Anna Kazanchyan, M.D. Vanessa A. Rath Health Care Services Joel M. Ray, CFA Julie S. Peterman Health Care Distribution Seth Teich, CFA Alexandra Ward, CFA Medical Technology/Devices Andrew T. Jay, DMD Jason S. Robins, CFA Specialty Pharmaceuticals Michael K. Tong, PhD, CFA Victor Lau (212) 909-0972 (212) 909-0952 (804) 868-1129 (804) 868-1131

TECHNOLOGY
Communication Semiconductors Karl Motey (415) 836-5903 Niraj Patel (415) 778-3958 Communications Equipment/Intelligent Network Richard A. Church (443) 263-6525 William J. Gildea (443) 263-6453 Communications Equipment/Optical Stephen G. Koffler (212) 891-5024 Lori Franklin (212) 891-5054 Mariza Costa (212) 891-5066 Communications Equipment/Wireless Mark A. Roberts, CFA (650) 571-7285 Michael A. Whitfield (415) 284-6961 Jason Kutsurelis (415) 836-5907 Data Storage Andrea Grosz Ren Zamora Electronic Supply Chain William E. Cage, Jr., CFA Anton Hie Electronic Processing David A Trossman, CFA Christopher M. Gay, CFA Enterprise Software Mark S. Tyler, CFA Matthew S. McCall (312) 574-6235 (312) 574-5175 (615) 341-3930 (615) 341-3931 (410) 625-6371 (410) 625-6381

Business Services D. Cotton Swindell David W. Foertsch

(443) 263-6526 (443) 263-6530

(415) 284-6959 (415) 836-5909 (617) 603-4260 (617) 603-4261 (212) 891-5067 (212) 891-5035

Floorcoverings/Furniture/Household Products John A. Baugh, CFA (804) 868-1101 Scott H. Miller (804) 868-1121 Food Retailing/Tobacco L. James Borges, CFA Human Capital Solutions Mark S. Marcon, CFA B. Paul Carder, CFA Restaurants/Foodservice Jeffrey F. Omohundro, CFA Katie H. Willett John C. White, CFA L. James Borges, CFA

(804) 868-1102

INDUSTRIAL
(804) 868-1117 (804) 868-1103 Aerospace & Defense Sam J. Pearlstein Gary S. Liebowitz Andrew Sullivan Automotive Jon V. Rogers Elizabeth Lepore Industrial Growth/Construction Robert R. Marshall Gregory Korondi, CFA (212) 891-5071 (212) 891-5023 (212) 891-5095 (212) 891-5043 (212) 891-5061 (804) 868-1118 (804) 868-1115

(804) 868-1125 (804) 868-1135 (804) 868-1150 (804) 868-1102

ENERGY
Exploration and Production Jonathan D. Wolff, CFA Lisa King Master Limited Partnerships Arnold P. Kaufman Oilfield Services & Drilling Yves C. Siegel, CFA Lenny Zephirin Arnold P. Kaufman Power Technology William Fogel Michael Blum Thomas A. McGovern Lisa Hausner Publishing Director lisa.hausner@wachovia.com (212) 891-5064 (212) 891-5047 (212) 891-5032

Industrial Products and Services Thomas J. D'Amore, CFA (312) 574-5385 Multi-Industry/Electrical Equipment Brian Langenberg, CFA (312) 574-5910 Colin McCue (312) 574-5927 Thomas J. D'Amore, CFA (312) 574-5385

(804) 868-1133 (804) 868-1134

MEDIA
Media/Entertainment/TV Scott B. Davis (212) 891-5091

Information Technology (IT) Services Edward S. Caso, Jr., CFA (443) 263-6524 Clint Fendley (443) 263-6528 Networking Software/Internet Infrastructure Christopher S. Russ (212) 891-5037 Marcus Cohen (212) 891-5041 Software-Internet Software Jason Maynard Karen Russillo Bryan McGrath (415) 284-1369 (415) 836-5940 (415) 836-5902

(212) 891-5036 (212) 909-0056 (212) 891-5032 (212) 909-0047 (212) 909-0056 (212) 909-0057 (443) 263-6522

Print Media/Information Services Asa W. Graves, CFA (804) 868-1105 Radio Broadcasting/Cable James B. Boyle Maurice C. McKenzie Daniel Moore, CFA (212) 891-5038 (212) 891-5009 (212) 891-5089

Lisa Howard Director of Operations & Administration (410) 625-6380 lisa.howard@wachovia.com