NEW YORK – Shares of consumer finance companies plunged Wednesday, led lower by Capital One Financial Corp. (COF), as investors worried about slowing loan growth and the effects of a weak economy.
"There's a group of investors who are concerned about the health of the consumer and the economy," said Bear Stearns analyst David Hochstim. "The simple view is, if you're worried about the consumer, then you should really be worried about consumer lenders."
Hochstim said short sellers, or investors betting that a stock will fall, were also likely fueling the price drop in consumer finaThat's far below company's 52-week high of $63.25 reached in April, reflecting the erosion of investor confidence and Household's announcement last week that it would pay up to $484 million to settle charges of predatory lending.
Earlier in the day, Prospect Heights, Illinois-based Household (HI), the No. 2 U.S. consumer finance company behind Citigroup, said its quarterly earnings fell by more than 50 percent, to $221 million.
Both Capital One and Household lend to people with checkered credit histories — known as subprime borrowers — increasing their potential exposure to dud loans.
Adding to concerns about consumer finance companies' profit outlook are new government guidelines that will force the companies to beef up loan-loss reserves. Regulators have increased their scrutiny of subprime lenders since Providian Financial Corp. (PVN) racked up huge losses last year as its stock cratered.
Shares of Providian were off 18 percent, or 81 cents, at $3.69 in midday trade.
Shares of MBNA Corp. (KRB), a big credit card issuer that caters to borrowers with better credit, fell nearly 8 percent to $18.31. MBNA, which is due to report quarterly results Thursday, has said it may have to take a charge of $200 million to $300 million under new government guidelines for lending.
The rampant selling surprised Bear Stearns' Hochstim, who said investors may be overreacting to the risks associated with the consumer finance sector.
"It seems excessive to me," he said. "Only time will tell whether the consumer really has a problem or whether it's right to be so worried about these consumer lenders."