MasterCard Falls Most in Year After 18% Profit Drop (Update2)

By Hugh Son May 1 (Bloomberg) -- MasterCard Inc., the world’s second- largest electronic payments network, fell 5.8 percent in New York trading after profit slipped 18 percent and the firm said net income targets may not be reached this year. First-quarter net income fell to $367.3 million, or $2.81 a basic share, from $446.9 million, or $3.38 a year earlier as credit-card spending fell, the Purchase, New York-based company said today in a statement. MasterCard declined $10.55 to $172.90 at 4:15 p.m. in New York Stock Exchange composite trading, after falling 11 percent earlier. Chief Executive Officer Robert Selander is cutting expenses to approach profit targets jeopardized as U.S. unemployment rises and banks curtail credit limits. The company, which collects fees to shuttle payments between financial institutions, will find it “very challenging” to achieve a previous net income growth target of 20 percent to 30 percent this year, Selander said today in an interview. “We did see a slowdown in revenue,” Selander said. “I never believe to say anything is out of reach, but if you were to take the first quarter, it would be a very challenging objective to deliver for 2009.” MasterCard will meet the goal over the “longer term,” Selander said. The company’s profit rose about 13 percent in the first quarter, excluding one-time gains a year earlier, he said. Revenue Decline Revenue declined 2.2 percent to $1.2 billion from a year earlier because of “the unfavorable impact of foreign currency exchange,” the company said. The gross dollar volume on credit- card transactions around the world declined 15 percent to $369 billion, while debit volume rose 3.2 percent to $181 billion. Operating expenses declined 11 percent to $595 million as MasterCard cut advertising and marketing costs by 35 percent and travel and personnel costs by 3 percent, including $19 million of severance. MasterCard said in November the company is freezing hiring and reducing travel costs. The company eliminated about 130 positions in the first quarter, Selander said in the interview, and will probably cut more positions in areas where resources aren’t needed, he said. “We think MasterCard is doing what they can, which is control their expenses,” said Andrew Miedler, an analyst at Edward Jones with a “buy” rating on the firm, in an interview. MasterCard results beat the $2.62 average estimate of 21 analysts surveyed by Bloomberg. Visa Outlook Visa Inc., the largest network, said this week that fiscal second-quarter profit climbed 71 percent to $536 million as consumers relied more on debit cards to make purchases and the firm reduced expenses. Visa, based in San Francisco, has three-quarters of the U.S. debit market by purchase volume. The company said debit growth offset a drop in credit-card use and reaffirmed estimates that earnings per share will increase at least 20 percent through 2010. Like Visa, MasterCard is insulated from rising credit-card defaults because the networks process transactions and don’t make loans to cardholders. Lenders have reported losses or declining profits as U.S. unemployment surged to 8.5 percent in March, the highest in 25 years, making it harder for consumers to repay debts. American Express said last week that first-quarter profit from continuing operations plunged 58 percent to $443 million as its U.S. card unit posted a $25 million loss. The company boosted loss provisions by 57 percent to $1.4 billion from a year earlier. Charge-Offs The lender’s charge-offs, or loans deemed uncollectible, surged to 8.5 percent in the quarter, from 4.3 percent a year earlier. The charge-off rate will climb by 2 percent to 2.5 percent in the second quarter and another 0.5 percent in the third, CEO Kenneth Chenault said. Capital One Financial Corp., the Mclean, Virginia-based credit-card company, posted a $111.9 million first-quarter loss last week as it set aside more for loan defaults. The bank said its previous estimate of $8.6 billion in failed 2009 loans was too low and declined to update the guidance. Capital One said charge-offs in its U.S. card business reached 8.4 percent in the first quarter, exceeding the 8.1 percent estimate given last year. The rate will “cross 10 percent in the next couple of months,” CEO Richard Fairbank said in a conference call. Bank of America Corp., the largest U.S. lender by assets, reported a $1.77 billion first-quarter loss in its credit-card services unit, compared with an $867 million gain a year earlier. Charging off bad credit-card loans and increasing reserves for expected defaults cost $8.2 billion, up from $4.3 billion a year earlier. Discover Financial Services, the Riverwoods, Illinois-based lender that also runs the fourth-largest credit-card network, said in March that first-quarter earnings from continuing operations fell 50 percent to $120 million. The firm tripled its provision for loan losses to $937.8 million from $305.6 million a year earlier. To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net ----- Impact of Foreign Currency Rates Our overall operating results are impacted by changes in foreign currency exchange rates, especially the strengthening or weakening of the U.S. dollar versus the euro and Brazilian real. The functional currency of MasterCard Europe, our principal European operating subsidiary, is the euro, and the functional currency of our Brazilian subsidiary is the Brazilian real. Accordingly, the strengthening or weakening of the U.S. dollar versus the euro and Brazilian real impacts the translation of our European and Brazilian subsidiaries’ operating results into the U.S. dollar. During the three months ended March 31, 2009, the U.S. dollar strengthened against the euro and Brazilian real, resulting in lower revenues and expenses. During the three months ended March 31, 2008, the U.S. dollar weakened against the euro and Brazilian real, resulting in higher revenues and expenses. In addition, changes in foreign currency exchange rates directly impact the calculation of gross dollar volume (“GDV”) and gross euro volume (“GEV”), which are key variables in the calculation of our domestic assessments, cross-border volume fees and volume related rebates and incentives. In most non-European regions, GDV is calculated based on local currency spending volume converted to U.S. dollars using average exchange rates for the period. In Europe, GEV is calculated based on local currency spending volume converted to euros using average exchange rates for the period. As a result, our domestic assessments, cross-border volume fees and volume related rebates and incentives are impacted by the strengthening or weakening of the U.S. dollar versus most non-European local currencies and the strengthening or weakening of the euro versus European local currencies. In the three months ended March 31, 2009 versus the comparable period in 2008, the U.S. dollar strengthened as evidenced by a