Capital One Financial Is Not American Express

After a short respite, Capital One Financial's (COF) delinquency metrics degraded again. While the market treats COF as if it is American Express (AXP), there is a difference between the two. Unfortunately this is a "student body left" environment where almost all companies in a sector are treated the same. Now it was not a huge jump, but it shows "2nd derivative improvement" is not a keen theory among U.S. consumers. The stock is down a whopping 2.7% off the news ... of course John Paulson disclosed a bigger stake in the name so that will help. Car loans weakened significantly. Canadian loans approaching U.S. levels of delinquency? hmm

In the bigger picture - these credit card figures from COF represent middle America far more than Amex does.

Via Reuters

• Capital One Financial Corp's (COF) U.S. credit-card defaults and delinquencies rose in July, as more Americans lost jobs and struggled to pay their debts.
• The trend differs from American Express Co's comments earlier this month, when the largest U.S. credit-card company by sales announced defaults declined in July for a second straight month and said it saw the first signs of improvement in the industry in 18 months.
• In a regulatory filing on Monday, Capital One said the annualized net charge-off rate for U.S. credit cards -- debts the company believes it will never collect -- increased to 9.83 percent in July from 9.73 percent in June.
• Capital One, one of the largest issuers of Visa and MasterCard credit cards, said accounts at least 30 days delinquent -- an indicator of future loan losses -- inched up to 4.83 percent from 4.77 percent.
• For U.S. auto loans, Capital One's charge-off rate rose to 4.26 percent in July from 3.89 percent in June, and the delinquency rate increased to 9.22 percent from 8.89 percent.
• In international operations, including Canada and Britain, the charge-off rate went up to 9.76 percent in July from 9.26 percent in June, while the delinquency rate fell to 6.68 percent from 6.69 percent.

We'll see if the rest of the companies report similar numbers or if COF is an outlier in the group.

• Earlier this month, rival card issuer American Express Co. said its rate of losses from credit card loans was slowing. The write-off rate on card balances fell to 9.2 percent in July from 10 percent during the second quarter, the company said.

Remember, American Express has reduced its outstanding credit much more aggressively than peers. [Apr 24: American Express Not too Shabby Earnings; It's Not Capital One Financial (COF) or Discover Financial (DFS)] Two different companies

The efforts earned AmEx some bad press for its hard-nosed tactics but enabled the company to reduce its U.S. credit-card receivables total (the denominator of the charge-off data) to $57.8 billion at the end of February from $65.9 billion at year-end 2007.

[Apr 15: Capital One (COF) Defaults Continue Their Upward March]

Short Capital One Financial in fund; no personal position

Comments

[john s. gordon:]

well amex is a prestige card (business users mostly), if you drive a lexus or mercedes you gotta have an amex.
> jack

Aug 18 09:11 AM

[TeresaE:]

Capital One was pretty aggressive in closing down accounts too.

Problem is they primarily closed down long standing, zero balance, high interest accounts. So, their best customers.

Foolish plan I think.

And Amex is still shutting down credit, they also rescinded an entire strata of credit to small businesses. The rape & pillage of America's small businesses continues unabated.

Which will lead to more defaults as the formerly employed open their eyes to the empty buildings surrounding their towns.

Aug 18 09:28 AM

[LoveShorting:]

Thanks, Mark. couldn't agree more. I never leave home without my AmEx and I will stay short COF until it pays, in fact, I am adding 50%.

Aug 18 10:00 AM

[Danny Furman:]

Thanks for the analysis, Mark. I don't have any experience shorting stocks, but current valuations make COF, among others, an appealing candidate. I'm curious why you haven't shorted the stock in your personal portfolio. Do you trade leveraged short ETFs instead of shorting stocks to mitigate risk? Are there junkier companies that have had similar run ups that you see as better short sell candidates? Is the market not yet in bubble territory?
Thank you and all the best.

Aug 18 10:14 AM

[Tack:]

After being down a "whopping" 2.7%, it's now up a more whopping 3.2%. Guess it doesn't matter whether it's exactly like AXP.

The bottom line is that general consumer credit conditions are gradually improving, no matter the individual anecdotal stories that are publicized.

Aug 18 12:37 PM

[TraderMark:]

My track record shorting COF is not good - this is like my Moby Dick. Now I have to fight Paulson as well. ;) But that gap in the chart will get filled. Just have to stay alive until it does.


On Aug 18 10:00 AM LoveShorting wrote:

> Thanks, Mark. couldn't agree more. I never leave home without my
> AmEx and I will stay short COF until it pays, in fact, I am adding
> 50%.

Aug 18 12:39 PM

[TraderMark:]

I had other names I was shorting, can't have them all in the personal account. I might have 50 candidates and only can short a few - plus my personal account has been ignored much of the past year since I am working on so many things so its not getting the needed attention to be honest.


On Aug 18 10:14 AM Danny Furman wrote:

> Thanks for the analysis, Mark. I don't have any experience shorting
> stocks, but current valuations make COF, among others, an appealing
> candidate. I'm curious why you haven't shorted the stock in your
> personal portfolio. Do you trade leveraged short ETFs instead of
> shorting stocks to mitigate risk? Are there junkier companies that
> have had similar run ups that you see as better short sell candidates?
> Is the market not yet in bubble territory?
> Thank you and all the best.

Aug 18 12:40 PM

[Danny Furman:]

Thanks for the responses, Mark.

Aug 18 04:58 PM