Fewer Stiffs Using Capital One Plastic as Card Defaults Drop

Capital One CreditCapital One's (COF) credit card charge-off rate -- the percentage of debt that it's unable to collect -- fell to 4.97% in April this year. That's the lowest default rate for the company since 2007. Capital One is the fourth largest issuer of credit cards in the U.S., with around $65 billion as outstanding credit card loans. It competes with JPMorgan (JPM), Bank of America (BAC), Citigroup (C) and American Express (AXP) in the credit card business.

The credit card business is the largest source of value for Capital One and constitutes 71% of our $60.65 stock price estimate for the company, which is roughly 20% above the current market price.

In April, Capital One wrote off $224 million as bad debt or roughly 4.97% of balances on an annualized basis, down from $248 million or 5.87% the previous month.

One of the reasons for the decline in charge-offs is stricter regulation on the banking industry triggered by the global economic crisis. Banks have also become more conservative in their lending standards and are avoiding giving loans where default risks are high. The industry wide charge-off rate peaked at 10.9% in March 2010, but has declined ever since. The current charge-off rate is still higher than 3.82% that the industry enjoyed before the recession.

We estimate the decline in charge-offs will bring down the provisions (as a percentage of total loans) to about 4.1% in 2011 from 5.1% in 2010. The delinquency rate, considered an indicator of potential defaults by customers, also dropped to 3.4% in April from 3.6% the previous month. This suggests that there is room for Capital One to decrease its provisions for bad loans to about 3.5% of total loans. Such a scenario would boost our $60.65 price estimate for Capital One's stock by about 10%.

See our full analysis of Capital One

Trefis is an online investment research platform targeted towards individual and professional investors. Trefis also includes a community of users that can create and share their models and analysis on trefis.com.

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.

Increase your money and finance knowledge from home

Goal Setting

Want to succeed? Then you need goals!

View Course »

What is Short Selling?

Make a profit when stocks prices fall.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

I know some of the problem was when people lost jobs they could not afford to pay. The companies went into panic mode and started charging good customers higher interest rates to help cover their losses. Many people decided not to pay then because they felt they were getting the short end of the stick. I know friends and family who had a few cards with excellent payment records and interest rates around 7%. Then all of a sudden their credit limits were reduced and their interest first shot up to 18% then 26% and finally 33%. When they call and complain they are told there is nothing that can be done and they are allowed to do this. So if people chose to screw these companies good they deserve it.

June 30 2011 at 2:14 PM Report abuse -1 rate up rate down Reply

Peoples you just don't get it, capital one commercials with bunch of spending gangs is jut exactly how american customers make spending without any personal control and this is true because right now U.S. consumer personal debt is around $2,3 Trillion not included house market, in my opinion if Credit Card don't exist in this system in the past 40 to 50 years we will be in much better shape. AMEN.

June 29 2011 at 10:56 AM Report abuse +1 rate up rate down Reply

$ 32.95 Fee to replace a lost card........................Why live with your Enemy ? Then they make an innocent
mistake and bill me twice, then a long paper trail of you protest a charge, etc.

Credit Cards like Capital One remind me how dumb I am to continue with them !

June 29 2011 at 8:17 AM Report abuse +1 rate up rate down Reply

capital one sucks! They raised my interest fr 9.99% to 17.9% for NO reason after being w/them for at least 10-12 yrs. we had 2 accts w/them. they are now paid off & WE WILL NEVER USE THEIR CARDS AGAIN.

June 29 2011 at 7:32 AM Report abuse -1 rate up rate down Reply
1 reply to Kathy's comment

They do suck!!! High APR's annual fees and very low credit limits...they wondered why I wanted to cancel a 1k limit, 17.9 apr with a 39/yr annual fee???

June 29 2011 at 7:36 AM Report abuse -1 rate up rate down Reply