On Tuesday, the third-largest issuer of Visa credit cards, Capital One Financial Corp. (COF) stated a rise in its net annual charge-off rate to 9.60% in Nov 2009 from 9.04% in Oct 2009. The statement came as a Securities and Exchange Commission (SEC) filing, thereby signifying its continuous credit card quality deterioration and payment failures.
The charge-off rate is the percentage of default loans compared to total loans of the company. Additionally, the rate for loans at least 30 days delinquent rose significantly to 5.87% in Nov 2009 from 5.72% in Oct 2009.
Although the charge-off rate in the auto-loan segment of the company fell from 4.32% in Oct to 3.67% in Nov 2009, the delinquency rate ascended to 9.57% from 9.30% in Nov 2009.
However, the non-U.S. position appeared to be marginally better. According to the SEC filing, Capital One’s charge-off rate for international card operations was flat at 9.50%, marginally up from 9.49%. The international delinquency rate was slightly down to 6.60% from 6.67%.
We believe the adverse trend of the charge-off ratio has accelerated in the recent quarters and is anticipated to continue at least through the first quarter of 2010. Cyclical factors such as the ongoing financial crisis across economies, weak capital markets, job losses and rising unemployment issues have contracted the consumers’ debt-paying capacity. We don’t expect any significant improvement on this front anytime soon.
Although the market condition may stabilize by mid to end of fiscal 2010, any recovery in the credit business is likely to be hampered by the enactment of the new Credit Cardholders Bill of Rights Act in the U.S. and other restrictive regulatory measures in the U.K. and European Union. Nevertheless, these economic and government regulatory issues are also taking a toll on the profitability of Capital One’s peers such as SLM Corp. (SLM), Bank of America Corp. (BAC) and Discover Financial Services (DFS), to name a few.
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