Citigroup Inc. (C) has reported an increase in credit card charge-offs in February. Charge-offs — balances that are uncollectible by the company and are subsequently written off — have increased to 7.95% on an annualized basis in February from 7.49% in January at Citi. The uptick in the charge-off rate reversed the declining trend that Citi witnessed in the last four months.
However, Citi’s delinquency rate for loans due over 30 days inched down to 4.34% in February from 4.35% in January. This represents the lowest delinquency rate in the last two years.
Unlike Citi, the charge-off rates at Bank of America Corp. (BAC) have improved in February. It fell to 8.84% on an annualized basis in February from 9.20% in January. While this marks Bank of America’s lowest default rate in the last two years, it is still higher than that of Citi’s default rate. However, the delinquency rate for 30 days or more fell toan annualized rate of 5.09% from 5.17% in January.
Similar to Bank of America, Capital One Financial Corp. (COF) also experienced an improvement in the charge-off rate and delinquency level in February.
The economic downturn and the high levels of unemployment resulted in customers defaulting on their credit card payments. As a result, banks have recorded significant charge-offs in the previous years. Nevertheless, with several steps to restore the economy, companies are experiencing an improvement in the charge-off rate.
Our Take
Despite the sudden uptick in the charge-off rate at Citi, we note that the delinquency levels have improved for the company. It is a ray of hope as credit card lenders saw a fall in the delinquency rates. Typically, delinquency means the failure to make a payment on an obligation when due.
We think that the drop in delinquency rate is a good sign of the overall health of the economy. It implies that people are making payments lessening the chance of loans being charged off in future.
Citi reported its fourth quarter 2010 earnings in January. Earnings for the quarter came in at 4 cents per share and fell short of the Zacks Consensus Estimate of 8 cents and as the company reported a drop in revenues. The revenue figure includes a negative credit value adjustment of $1.1 billion that resulted from tightened spreads. Additionally, there was also an escalation in expenses.
However, the decrease in loan loss provisions was on the upside. Though restructuring initiatives are encouraging, the revenue headwind remains a concern. The shrinking of its business through assets sale, the CARD Act and the financial reform law continue to challenge revenue.
We believe that solid earnings at Citigroup would remain elusive until its revenue experiences a decent growth. Nevertheless, the company’s core business, Citicorp, remains attractive and its global footprint is impressive.Also, its credit quality improvement is encouraging.
Citi currently retains a Zacks #3 Rank, which translates into a short-term Hold” rating. Considering its fundamentals we also have a ‘Neutral’ rating on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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