Capital One Stands Out Among U.S. Card Lenders With Highest Charge-Off Rate

by Trefis Team
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Card charge-off rates have been elevated across the industry over the last two quarters, but Capital One is faring much worse than its peers with a figure in excess of 5% for Q2 2017. This compares with the average figure of 3.64% for the U.S. card industry for the same period.

Individual charge-off figures above are taken from the latest quarterly 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 quarters. The red-to-green shading across a row should help identify trends in card charge-off rates for a particular lender over this period. The sharp increase in the charge-off figure across lenders over the last three quarters is clearly seen here. That said, the weighted average charge-off figure for these lenders remains lower than the industry average.

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, as this acts as a protection against loan losses. Discover also has lower-than-average charge-off rates, largely due to a selective card lending policy. At the other end of the spectrum is Capital One, with a charge-off rate above 5% for the first two quarters of the year. We believe that the elevated figure is indicative of lenient card lending criteria by the company – something that could lead to significant losses under weak economic conditions.

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

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