Mixed Bag for NCOs & Delinquency - Analyst Blog

Regulatory filings by major credit card companies for the month of July showed mixed results in credit card defaults and delinquency rate. On Monday, three of the nation's top six credit card companies reported a decline in card defaults, while four of them recorded reduced delinquency rates.

JPMorgan Chase & Co.(JPM), Discover Financial Services (DFS) and Capital One Financial Corp. (COF) recorded further drop in their respective credit card defaults, whereas Bank of America Corporation (BAC), American Express Company (AXP) and Citigroup Inc. (C) reported a surge for the same.

Card companies usually write off the loans that are 180 days past due and assume them as uncollectible. On an annualized basis, Capital One’s net charges-off (NCOs) fell 37 basis points from the prior month to 3.77% in July. This is the fourth consecutive month that the company’s NCOs have stood below 5% since late 2007. The NCOs of Capital One had climbed up to 10.87% in March 2010 before the downward trend began.

Similarly, JPMorgan reported a decrease in NCOs to 4.78% of its total loan balance in July compared with 4.94% in June. This is substantially lower than the peak of 10.91% recorded in January 2010.

However, for BofA, on an annualized basis, NCOs improved to 7.43% in July as against 6.97% in June. The company’s July figure includes the one-time impact of the transition to a more conservative approach for recognizing losses on accounts of customers who have died. Hence, excluding this one time change, NCOs stood at 7.14% for the month under review. Nevertheless, this was significantly below 14.53% recorded by the company in August 2009.

In July, delinquency rate, indicating the future rate of default, dropped for BofA, JPMorgan, Citigroup and Discover Financial and increased for Capital One, but it remained unchanged for American Express.

BofA’s delinquency rate for 30 days or more (on an annualized basis) declined for the tenth consecutive month to 4.05% as against 4.16% in June 2011. For JPMorgan, delinquency rate for 30 days or more (on an annualized basis) inched down from 2.59% in June to 2.52% in July, marking the company’s lowest delinquency rate since late 2007.

However, delinquency rate for 30 days or more (on an annualized basis) for Capital One inched up to 3.37% from 3.33% in June. However, the company’s delinquency rate for 30 days or more has stood below 5% since May 2010.

The declining default rates are largely emanating from the defaulting card holders' inability to get cards with large credit limits. Moreover, banks have already written off balances of those customers who are most likely to default. Besides, the declining default trend is also reflective of the card owners’ improved financial condition and ability to pay off their debts.

Currently, Discover Financial retains a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating; American Express retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating; and JPMorgan, Capital One, 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

Zacks Investment Research