How Have Charge-Off Rates For Major U.S. Card Issuers Trended Over Recent Quarters?

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Capital One Financial

Credit card charge-off rates for the largest card issuers in the country decline in Q3 after being elevated over the first half of the year. As economic conditions have remained largely unchanged over recent quarters, the trend can be attributed to the seasonal nature of the card lending business.

Card_QA_ChargeOffChange_16Q3

Individual charge-off figures above are taken from the latest quarterly earnings releases for these card issuers. The weighted average charge-off rate represents the average card charge-off rate for these card issuers as weighed by their outstanding card balances. The average figure for the U.S. card industry is taken from data compiled by the Federal Reserve Bank of St. Louis here. The red-to-green shading across a row should help identify trends in card charge-off rates for a particular lender over this period.

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Notably, card charge-off rates nudged higher across the industry over the first two quarters of the year after hovering around unusually low levels in 2014-15. This was partly due to normalization in consumer credit quality, which improved considerably due to low unemployment levels and steady economic growth since 2011. Although the figure fell to below 3% in Q3, the fact that there was an increase in charge-off rates year-on-year (from 2.76% to 2.86%) is further evidence of the ongoing normalization in card charge-off rates. As card lenders relax their lending policies to improve market share, we expect charge-offs to increase further over subsequent quarters before stabilizing. However, aggressive card lending policies could also raise overall card charge-off rates in the long run.

That said, the particularly high charge-off rate for Capital One over recent quarters could be indicative of more lenient card lending criteria from the card-focused banking giant compared to its peers. While this will allow the card-focused bank to charge higher its customers higher interest rates and other card-related fees in the short run, it can potentially incur huge losses if economic conditions deteriorate. The impact of a sharp increase in card charge-offs on our estimate for Capital One’s share price can be understood by making changes to the chart below, which captures the bank’s card loan provisions as a percentage of its total outstanding loan portfolio.

 

See the links below for more information about the U.S. card industry:

Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment/ ask questions on the comment section
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to the full Trefis analysis for U.S. Bancorp | Wells Fargo | JPMorgan ChaseBank of America | Citigroup | Capital OneAmerican Express | Discover

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