Earnings Preview: For Visa, Consumer Spending Holds the Key
It's no secret that consumers are defaulting on billions of dollars of credit card loans and are delinquent on billions more. Bank of America's (BAC) losses from credit cards totaled $7.7 billion in 2009, while JPMorgan Chase (JPM) charged off credit card loans totaling $10.37 billion. Both banks have set aside more for future losses.
However, Visa isn't affected by nonpaying consumers, since it doesn't make loans. Rather Visa and its largest rival, MasterCard (MA), make their money from fees they charges the banks to process payments that are made via credit and debit cards. The more consumers use plastic, the more Visa and MasterCard earn.
But last year, many credit card issuers reduced credit limits on card holders, cut back the number of credit cards in circulation, and even reduced the number of mailings for new card members. All these will likely combine to reduce the total number of transactions, which will pare down fees that Visa earns.
In its fiscal fourth quarter, which ended Sept. 30, the company did see lower activity. Its payments volume decreased by 2% and its total volume declined 3%.
Still, Visa has managed to report stellar earnings every quarter since it became a public company in 2008, and it has kept costs low.
Just three months ago, CEO Joseph Saunders struck a hopeful note. "As we enter our new fiscal year, we are beginning to see some very early signs of stabilization in our business," said Saunders on releasing his last earnings report.
On Wednesday, we'll find out if that optimism was justified.