NCOs & Delinquency Drop Continues - Analyst Blog

Regulatory filings by major credit card companies for the month of August revealed mixed results in credit card defaults and delinquency rate. According to the respective regulatory filing, four of the nation's top six credit card companies reported a decline in card defaults, while five of them recorded reduced delinquency rates.

JPMorgan Chase & Co.(JPM), Discover Financial Services (DFS), American Express Company (AXP) and Bank of America Corporation (BAC) recorded further drop in their respective credit card defaults, whereas Capital One Financial Corp. (COF) 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. JPMorgan reported a decrease in net charges-off (NCOs) to 4.67% of its total loan balance in August compared with 4.78% in July. This marks the lowest NCO level that the company has reported since September 2008 and is substantially lower than the peak of 10.91% recorded in January 2010.

Similarly, for BofA, on an annualized basis, NCOs declined to 6.79% in August as against 7.43% in July. The company’s July figure included the one-time impact of the transition to a more conservative approach for recognizing losses on accounts of deceased customers. Hence, excluding this one time change, NCOs for July stood at 7.14%. Furthermore, NCOs for the month under review were significantly below 14.53% recorded by the company in August 2009.

However, on an annualized basis, Capital One’s NCOs surged 33 basis points from the prior month to 4.10% in August, marking the first increase in the NCOs after eight consecutive months of decline.

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

BofA's delinquency rate for 30 days or more (on an annualized basis) declined for the eleventh consecutive month to 3.96% as against 4.05% in July 2011. For JPMorgan, delinquency rate for 30 days or more (on an annualized basis) dropped from 2.52% in July to 2.48% in August, marking the company’s lowest delinquency rate since late 2007.

The delinquency rate for 30 days or more (on an annualized basis) for Capital One inched up to 3.43% from 3.37% in July. However, the rate stood below 5% since May 2010 and remained well below the peak of 5.80% registered by the company in January 2009.

Our Viewpoint

The declining default rates are largely emanating from the defaulting card holders’ inability to get cards with large credit limits. Besides, the declining default trend is also reflective of the card owners’ improving financial condition. As they are gradually recovering from the after-effects of recession, they are trying to reduce their credit card debts.

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

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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