Card Charge-Off Rates For The Largest U.S. Issuers Rising Faster Than The Industry

by Trefis Team
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Among the largest U.S. card lenders, Capital One reported the highest card charge-off rate of 4.1% for full year 2016 – a figure much higher than the average of 3.17% for the industry.

Card_QA_ChargeOff_FY16

Individual charge-off figures above are taken from the latest annual SEC filings 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 table below details the trend in card charge-off rates for these card issuers over the last five years. The red-to-green shading across a row should help identify trends in card charge-off rates for a particular lender over this period.

Card_QA_ChargeOffChange_FY16

The charge-off rate is widely used as a parameter to gauge the quality of a lender’s loan portfolio, as it represents the proportion of loans which the lender is forced to write off for a given period. A lender with a higher charge-off rate historically is likely to see a larger hit in profitability in the event of weak economic conditions, as it usually indicates more relaxed lending standards. On the other hand, lenders that follow strict lending guidelines are expected to see lower loan charge-offs compared to their peers.

Historically, American Express has enjoyed the lowest card charge-off rates among all card lenders in the U.S. thanks to its policy of focusing on affluent clients. This in itself acts as a protection against loan losses. Discover also has lower-than-average charge-off rates, also largely due to a selective card lending policy. Notably, Bank of America has seen the most improvement in card charge-off rates among the lenders listed here, as this figure fell from almost 5% in 2012 to 2.51% in 2016. This change can be attributed to the bank’s decision to divest its international card business and to improve its U.S. card portfolio in 2012.

On the other hand, Capital One has been reporting significantly elevated card charge-off rates over recent quarters. It should be noted that Capital One saw its charge-off rates jump in 2013 as a result of its acquisition of HSBC’s card business in the U.S., and the banking group did well to improve loan loss figures over 2014-15 by running off and also selling chunks of its non-core card balances. But the recent trend of rapidly increasing loan losses is likely indicative of more lenient card lending criteria by the company. While this has allowed the card-focused bank to benefit from higher interest revenues and other card-related fees from new customers, the quality of the loan book has definitely deteriorated. This can trigger over-sized losses if economic conditions weaken in the near future.

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:

See full Trefis analysis for U.S. Bancorp | Wells Fargo | JPMorgan ChaseBank of America | Citigroup | Capital OneAmerican Express | Discover

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