Providian Rocked By Soaring Losses

The subprime credit card lender Providian Financial Corp. stunned industry analysts by announcing third quarter earnings that were much lower than previously estimated, despite strong loan growth. Net income for the quarter was down to $57.2 million (20 cents a share) as compared to $200.7 million (68 cents a share) a year ago. Ballooning losses were responsible, as the company's chargeoff rate rose to 10.33 percent. More ominously, the company warned that its chargeoff rate would likely rise above 12 percent in the fourth quarter. Further doubts about the company's prospects were fueled when its longtime leader, Shailesh Mehta, resigned as chairman and announced a search for a new chief executive officer. The unexpectedly poor earnings report and shakeup in leadership torpedoed the company's stock price. Shares of Providian fell to $5.15 a share following the announcement, after trading in the $55-60 range as recently as July.

In recent years Providian fueled its rapid portfolio growth through aggressive lending in the subprime end of the credit card market, acquiring account holders who had limited or bruised credit histories. The rapid worsening of its subprime portfolio in the current economic climate does not bode well for other subprime lenders. To curb further growth in its losses, Providian announced that it will suspend lending in its riskiest segment, which accounts for $9.4 billion, or about one-third of its $32 billion card portfolio. It will also reduce some credit lines, raise fees for some customers, and generally focus its efforts on acquiring and retaining less risky borrowers.