Capital One Investors React Negatively To Higher October Charge-Off Rates

Capital One Financial (NYSE:COF) shares shed 2.4% in trading on Thursday after the banking group reported a notable increase in its credit card charge-offs for the month of October. Shares recovered much of this on Friday however. The credit card portfolios of the country’s biggest card lenders have shown rather mixed results over the month marked by growing uncertainty in the U.S. economic conditions compounded by the fear of an impending fiscal cliff. While net charge-off rates for JPMorgan Chase (NYSE:JPM) declined over the month, those for Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Discover Financial Services (NYSE:DFS) increased over the same period.

We maintain a $61 price estimate for Capital One’s stock, which is at a premium of about 10% to current market prices.

See our full analysis for Capital One

As is evident from the chart above, Capital One derives a substantial share of its value from its credit card business – almost two-thirds of it according to our analysis. This would go a long way in explaining why an increase in the net charge-off rate figure for a month from 3.93% to 4.25% resulted in an almost 2.5% decline in Capital One’s share price. The fact that the fiscal cliff can potentially drive down consumer spending and increase unemployment is also not a good sign for the credit card companies, as this would only increase charge-off rates in the future.

The impact of an increase in Capital One’s credit card charge-offs on our estimate for its share value can be gauged by making changes to the chart below, as higher charge-offs will result in correspondingly higher provision figures.

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