COF Capital One Financial Corporation

The regulatory filings by major credit card companies have disclosed mixed results in credit card defaults and delinquency rate for November 2011. According to these filings, three of the nation's top six credit card companies reported a decline in card defaults, while two of them recorded lower delinquency rates.

In comparison with the prior month,Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), and Discover Financial Services (DFS) recorded a fall in their respective credit card defaults, where as Citigroup Inc. (C), American Express Company (AXP) and Capital One Financial Corp. (COF) reported a surge for the same.

Card companies usually write off the loans that are 180 days past due, assuming those as uncollectible. For BofA, on an annualized basis, net charges-off (NCO) rate fell to 5.67% in November 2011 as against 5.99% in October 2011 and 9.92% in November 2010.

Similarly, JPMorgan reported a drop in NCO rate to 4.02% of its total loan balance in November 2011 compared with 4.18% in October 2011 and 7.16% in November 2010.

However, on an annualized basis, Capital One’s NCO rate surged from 3.96% in the prior month but decreased from 7.56% in the prior-year month to 4.29% in November 2011.

In November 2011, the delinquency rate, indicating the future rate of default, dropped for BofA and Discover Financial, whereas it increased for JP Morgan and Citigroup; however, American Express and Capital One witnessed no change in it since October 2011.

For BofA, delinquency rate for 30 days or more (on an annualized basis) dropped from 3.97% in October 2011 and 5.47% in November 2010 to 3.96%. The delinquency rate for 30 days or more (on an annualized basis) for Capital One was at par with October 2011 but declined from 4.26% in November 2010 to 3.73% in November 2011.

Conversely, JPMorgan’s delinquency rate for 30 days or more (on an annualized basis) increased slightly to 2.56%, compared with 2.55% in October 2011 and 3.68% in November 2010.

Conclusion

The decline in default rates is largely arising from the inability of the defaulting card holders to get cards with large credit limits. Besides, this waning default trend signifies the card owners’ improving financial condition. As these card owners are gradually recovering from the after-effects of recession, they are trying their level best to reduce their credit card debts.

Additionally, various regulatory reforms undertaken by the Federal Reserve, including limiting the fees that banks can charge and constricting the pace at which they can raise their interest rates, are also enabling the card owners to bring down their balances.

However, the recent data from TransUnion shows that in the September quarter, a significant number of cards were issued to those customers who had some payment-related issues in the past.

This indicates that once these customers start using their cards, defaults may occur resulting into higher NCOs and delinquencies. So, we remain concerned about this trend going forward.

Currently, Capital One retains a Zacks #2 Rank, which translates into a short-term Buy’ rating, while Discover Financial, JPMorgan, American Express, Citigroup and BofA retain a Zacks #3 Rank, which implies a short-term ‘Hold’ rating.

 
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