Wall Street Greek: Credit Card Defaults Are Rising

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Credit Card Defaults Are Rising

Capital One Financial (NYSE: COF) today reported its credit card defaults jumped in September. In its monthly reporting of charge-off and delinquency statistics to the SEC, Capital One showed a marked increase in the percentage of its bad loans. However, COF's data did not reflect the norm in one respect, as many other major lenders posted improved charge-offs. Still, an increasing level of delinquencies of 30 days or more characterized the broader credit card market in September. This, in turn, portends deterioration in future charge-off rates.

Capital One Financial

Month	Charge-Offs	Delinquencies
September	9.77%	5.38%
August	9.32%	5.09%
July	9.83%	4.83%

The three month trend shows a logical rise in payment delinquency of 30 days or more, but the rate jumped up significantly in September. This seems to portend that October's charge-offs should surpass July's mark of 9.83% of loans outstanding. In Capital One's case, charge-offs are already running away, and so the stock's retrenchment today has solid reasoning (-3.7% at hour of publishing).

It, of course, makes perfect sense that bad loan debt should increase while unemployment does. The unemployment rate touched 9.8% in September, and looks destined to peak somewhere near our prediction (way back in 2008) of 10%. Borderline borrowers who live paycheck to paycheck seem to be Capital One's target market. So when unemployment increases and those folks barely have money to pay the electric bill, guess who is going to take a hit...

We say blue-to-no collar "seems" to be Capital One's target market based on its aggressive and broad sweeping advertising campaigns. Its bad loan comparison to other lenders seems to confirm that as well. Where Capital One's troubles are deteriorating, others are seeing improvement. American Express (NYSE: AXP), for instance, today reported better charge-offs and stabilized delinquencies.

American Express

Month	Charge-Offs	Delinquencies
September	8.4%	4.1%
August	9.0%	4.1%
July	9.2%	4.2%

Discover Financial Services (NYSE: DFS) reported improved charge-offs, but also showed higher delinquencies of 30 days or more. This is a trend that accurately characterizes the broader credit card issuance industry.

Discover Financial

Month	Charge-Offs	Delinquencies
September	8.69%	5.57%
August	9.16%	5.35%

J.P. Morgan Chase (NYSE: JPM), the nation's largest credit card issuer, reported a $700 million third quarter loss in its credit card unit Wednesday. JPM noted things might get worse for the segment in its fourth quarter. J.P. Morgan wrote off 9.41% of its credit card loans in Q3, up from 8.97% in Q2. The nation's largest bank also had some bad news to note today. Bank of America (NYSE: BAC) reported a lower charge-off rate in September, but it still stood at 14.25% (14.54% in August), significantly higher than the names above.

In short, while charge-offs stabilized or improved at many financial services firms in September, the general trend of rising delinquencies coincides with still increasing unemployment, and portends higher charge-offs in the next few months.

"The bump up in charge-offs in July may have come due to lenders' forcing borrowers to accept higher annual percentage rates or to close accounts."

The bump up in charge-offs in July may have come due to lenders' forcing borrowers to accept higher annual percentage rates or to close accounts. This was inspired by the time cushion between the passing of credit card reform legislation and its effective date. Lenders are doing all they can to position themselves best for the new playing field. Still, no matter the case, a troubling trend is clearly getting worse. Defaults and charge-offs will continue higher in coming months, and with many borrowers forced out, and credit more difficult to attain, consumer spending should also sink further. Happy holidays to ya!