Advanta and Charge Offs

In a story that I believe was underreported yesterday, the nation’s 11^th largest credit card issuer, Advanta (ADVNB), announced it will be suspending all credit card charges on outstanding credit cards as of June 10^th in order to “dramatically limit the company’s credit loss exposure and maximize its capital and its liquidity measures.”

As of March 31^st, Advanta’s charge-off rate stood at 20%.

The credit card freeze will affect all of Advanta’s almost one million existing small business credit card accounts. While Advanta does not offer personal credit cards, all of the small business accounts are backed by personal guarantees. Given that approximately 25% of the outstanding balances on Advanta’s credit cards are from small businesses in California and Florida, there is a strong possibility that the rising charge-off rate is related to declining real estate values – and that many of Advanta’s small business accounts were sole proprietors using their card ostensibly as consumer credit cards, yet with higher credit lines.

Advanta’s announcement comes less than a week after two other credit card companies, American Express (AXP) and Capital One (COF), passed the government’s stress test and were deemed sufficiently capitalized so as not to be required to raise any additional capital.