Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co., raised his rating of Advanta Corp. to "market perform," from "underperform," on Wednesday, writing that the stock has fallen to a point at which "valuation better reflects risks."

"Make no mistake, we are not recommending shares for purchase, given our expectation for continued credit deterioration, which could potentially be significant," Valentin wrote to clients.

Rather, the new rating reflects his view that a bigger-than-expected increase in Advanta's net interest margin in the second quarter, "combined with increased liquidity and depressed share price, has skewed the risk/reward to a more even level."

He reiterated his price target for the Spring House, Pa., company's class B shares as $6.25 a share, or 43% of the current book value of $14.48 per share.

The margin expansion should help offset higher chargeoffs at Advanta, he wrote.
He said he expects the net interest margin "to continue expanding as the large number of accounts added in 2007 reprice from 0% teaser rates."

However, the company, which specializes in issuing credit cards to small businesses, added less to reserves than he expected last quarter, "despite higher losses and commitment to payment of a dividend that is depleting capital."

Although Advanta's management team has touted an improvement in delinquency trends "from early in the year," he wrote, "we are not ready to call it a sustainable trend," since it "could be due to seasonality."

On a conference call Tuesday, Phil Browne, Advanta's chief financial officer, warned that if the excess spread in its securitization trusts averaged less than 4.5% for three months, it would have to allow $50 million to accumulate in cash collateral accounts.

However, he said, for June through August Advanta expects the excess spread "most likely … will be above the 4.5% average … and then improve."

Valentin wrote that the biggest risk facing Advanta is that it will be forced to "trap cash" in the trusts this way, which would limit its ability to fund itself in the securitization market. 

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