Mixed NCO & Delinquency in October - Analyst Blog

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

Bank of America Corporation (BAC), Citigroup Inc. (C) and Discover Financial Services (DFS) recorded a fall in their respective credit card defaults while JPMorgan Chase & Co. (JPM), 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 5.98% in October 2011 as against 5.99% in September 2011 and 10.15% in October 2010.

However, on an annualized basis, Capital One’s NCO rate surged from 3.90% in the prior month but decreased from 7.26% in the prior-year month to 3.96% in October 2011. Also, JPMorgan reported a surge in NCO rate to 4.18% of its total loan balance in October 2011 compared with 4.13% in September 2011 and 7.0% in October 2010.

In October 2011, delinquency rate, indicating the future rate of default, dropped for BofA, Citigroup, American Express and Discover Financial, while it increased for JPMorgan and Capital One.

For BofA, delinquency rate for 30 days or more (on an annualized basis) dropped from 3.99% in September 2011 and 5.6% in October 2010 to 3.97% in the month under review.

However, JPMorgan’s delinquency rate for 30 days or more (on an annualized basis) was 2.55% compared with 2.53% in September 2011 and 3.81% in October 2010. The delinquency rate for 30 days or more (on an annualized basis) for Capital One inched up from 3.65% in September 2011 but declined from 4.45% in October 2010 to 3.73% in October 2011.

In Conclusion

For now, this steady decline in default and late payment rates has taken a backseat, owing to seasonality. Customers are prone to making late payments during fall and making up for these lapses later in the year.

Earlier, declining default rates largely emanated from defaulting card holders’ inability to get cards with large credit limits. Also, various regulatory reforms undertaken by the Federal Reserve, like putting a limit on fees that banks can charge and restricting the pace at which they can raise their interest rates, are also enabling card owners to lower their balances.

However, the recent data from the credit reporting agency 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.

Therefore, this indicates that once these customers start using their cards, there might be defaults leading to higher NCOs and delinquencies. So, we remain concerned about this trend going forward.

Currently, Discover Financial retains a Zacks #2 Rank, which translates into a short-term Buy rating, while JPMorgan, American Express, 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

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