Unlike AmEx, Capital One's Defaults Worsening

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Includes: AXP, COF, MA
by: Ockham Research

“You’ve been watching Capital One Financial, that’s one of the top stories talking about the July write-offs to have uncollectable loans and those rose 9.8% and Capital One Financial will certainly be a name to watch. When I looked up at the board I saw Mastercard is moving although credit cards were intended to be in focus today, but Mastercard just off the bat was looking $185 to $190. Last trade on that was over $202. So certainly not only watching Capital One Financial, but that name, Mastercard looking to the down side as well.” The Opening Bell on Fox Business 8/17/2009

In its regular monthly filing, Capital One Financial (NYSE:COF) reported that borrowers who are behind on payments had increased last month. The percentage of borrowers at least 30 days behind on payments increased to 4.83% in July from 4.77% in June. Furthermore, the credit card issuer wrote off 9.835% of its card loans last month, compared to 9.73% a month earlier. International operations showed charge-off rates worsened at an even faster rate from 9.26% to 9.76% in July. This is particularly distressing because American Express (NYSE:AXP), the largest credit card issuer by sales, reported a second straight month of improved charge-off rates falling dramatically from 9.9% to 9.2%. Shares of Capital One traded down about 3% today on the news.

COF There have been lingering concerns about companies that have a lot of exposure to consumer credit, as delinquencies are at multi-year highs. However, by looking at Capital One’s stock price chart you may not realize the troubling operating environment. Since the stock has hit 13-year low below $8, the stock has appreciated more than 300% mainly because of green shoots in the macro economy. That being said, Capital One continues to greatly outperform its competitors since the market bottomed in early March, even as the trends in delinquency are headed in the wrong direction. With unemployment continuing to worsen, we are not quite sure why investors have been so eager to buy into Capital One.

The latest data released by credit card issuers shows that consumer credit continues to be a difficult business in this environment. Not only are delinquency rates and chargeoff rates rising for Capital One, but there is very likely going to be legislation on the way which will be adverse to credit card industry profits. We are not advocating buying either Capital One or American Express at this time, but of the two it seems American Express’s portfolio of loans is making the turnaround faster than that of Capital One. Even though we have a Fairly Valued rating on COF, there is a good chance that the market will not tolerate increased chargeoffs much longer. Capital One will need to show improvement in its loan portfolio in order to justify the recent performance. Our outlook on these stocks will likely not turn bullish until unemployment rates start to improve markedly.

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