February 2, 2008

MasterCard profit up on card use abroad

NEW YORK - MasterCard's U.S. cardholders charged more in the last quarter of 2007 than they did in the previous year, but are spending less on discretionary items and more on necessities.

Americans may be taking on more debt to pay for the high price of food and gasoline, which could be a troubling trend for people if the economy keeps worsening and costs don't ease.

MasterCard reported Thursday a more than sevenfold rise in profit. The main drivers were the sale of a stake in a Brazilian company and strong card use by travelers and customers overseas, as well as a 10 percent rise in U.S. cards' gross dollar volume.

The company's shares soared $18, or 9.5 percent, to $207 Thursday.

Industrywide, Americans are paying down their balances at a slower rate than before, said Sanjay Sakhrani, card analyst at Keefe Bruyette & Woods. "The question is, as more people lose their jobs, as the economy weakens a little more, what the repercussions are."

Many homeowners are struggling with their mortgages, while commodity costs remain high. The Federal Reserve has been slashing key interest rates in an effort to revive the economy, but lower rates can accelerate inflation.

"Lower interest rates are not going to cure the problem of costs going up. It's only going to exacerbate that problem," said Greg McBride, senior financial analyst at Bankrate.com, an online financial information service.

Consumers increased their spending by 0.2 percent in December, the Commerce Department said Thursday, the weakest pace in six months. That pace could slow even more if the job market weakens — last week, applications for unemployment benefits soared to the highest weekly number since Oct. 8, 2005.

If the economy does fall into recession, people may not spend more, but they're likely to put more of their purchases on cards. MasterCard Chief Executive Robert Selander said that during the 2001 recession, slower gross dollar volume was offset by higher numbers of transactions.

"If you think about consumer behavior, when you are in a situation where you're worried about your job, or your mortgage or interest rates are high, you're going to stop spending on those luxury items and start focusing on those things you need — whether it's gas for your car or food for your family," said Selander in an interview with The Associated Press. "The consumer's behaving in a pretty rational way."

Purchase, N.Y.-based MasterCard said profit in the October to December period rose to $304 million, or $2.26 a share, from $40.9 million, or 30 cents a share, a year ago. Those results included an after-tax gain of $185 million from sales of the company's stake in Redecard SA, a company that signs up merchants in Brazil. Excluding that gain, profit came to 89 cents per share.

Revenue rose nearly 28 percent to $1.07 billion from $839.2 million.

The results were well above estimates. Analysts surveyed by Thomson Financial predicted, on average, earnings of 72 cents per share on revenue of $984.8 million.

The conversion of stronger currencies to the dollar boosted revenue by 4.7 percent, while international travel lifted cross-border transactions — which generate higher fees than domestic transactions — by nearly 28 percent.

Gross dollar volume rose 15.2 percent to $634 billion, discounting currency conversions.

The total number of transactions processed rose 17.2 percent to 5.2 billion.

About half of MasterCard's business is outside the United States.

MasterCard's full-year profit came to $1.09 billion, or $8.00 a share, on revenue of $4.07 billion.

The company said it expects its revenue to grow at a slower pace in 2008 than it did in 2007, but still at a double-digit percentage rate.

MasterCard does not have to sock away money for loan losses as many other companies do. Unlike American Express Co. and Discover Financial Services LLP, MasterCard processes card payments but does not take on the debt. The debt is held by the 25,000 banks in more than 200 countries — like Citigroup Inc. and JPMorgan Chase & Co. — that issue the cards.

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