COF Capital One Financial Corporation

The regulatory filings by major credit card companies have disclosed mixed results in credit card defaults and delinquency rates for January 2012. According to these filings, three of the nation's top six credit card companies reported lower rates of card default and delinquency.

In comparison with the prior month, Bank of America Corporation (BAC), American Express Company (AXP) and Discover Financial Services (DFS) recorded a fall in their respective credit card defaults, whereas Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) 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 5.63% in January 2012 as against 6.05% in December 2011 and 9.2% in January 2011.

However, on an annualized basis, Capital One’s NCO rate surged from 3.98% in the prior month but decreased from 6.79% in the prior-year month to 4.08% in January 2012. Similarly, JPMorgan reported a rise in NCO rate to 4.25% of its total loan balance in January 2012 compared with 4.11% in December 2011 and 5.97% in January 2011.

In January 2012, the delinquency rate, indicating the future rate of default, dropped for BofA, JP Morgan and Discover Financial, whereas it increased for Capital One and Citigroup; however, American Express witnessed no change in it since December 2011.

For BofA, delinquency rate for 30 days or more (on an annualized basis) slipped from 3.82% in December 2011 and 5.17% in January 2011 to 3.80%. Similarly, JPMorgan’s delinquency rate for 30 days or more (on an annualized basis) fell slightly to 2.45%, compared with 2.48% in December 2011 and 3.39% in January 2011.

Conversely, the delinquency rate for 30 days or more (on an annualized basis) for Capital One was 3.78% in January 2012, up from 3.66% in December 2011 but falling from 4.00% in January 2011.

Our Viewpoint

The decline in default rates has largely arisen 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.

We believe that overall credit quality will continue to improve in the near term. However, the pace of improvement would slow down, given the sluggish economic recovery.

Currently, Discover Financial retains a Zacks #1 Rank, which implies a short-term Strong Buy while, Capital One, JPMorgan, American Express, Citigroup and BofA retain a Zacks #3 Rank, which implies a short-term Hold rating.

 
AMER EXPRESS CO (AXP): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
CAPITAL ONE FIN (COF): Free Stock Analysis Report
 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
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