CARD CHARGE-OFFS UP LESS THAN EXPECTED. GREEN SHOOT?
Credit card issuers are surging today as they released data that was better across the board. Perhaps consumers aren’t as indebted as we believe. From the WSJ:
Shares of Capital One Financial Corp. (COF), Alliance Data Systems Corp. (ADS), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) rose Wednesday after they released better-than-expected delinquency and charge-off data for their credit-card businesses in June.
Capital One’s data showed that 30-day delinquencies, on a weighted average across its national lending business, declined in June from May. Its weighted average for national lending charge-offs – loans it doesn’t think are collectible – did rise from May but was lower than expected. The results “strengthen our view that the industry’s efforts to get delinquencies under control are producing favorable results,” Fox-Pitt analyst Bill Carcache told clients in a Wednesday note.
The results seen across a number of other credit-card issuers also supported that view. Alliance Data, known for its private-label cards, posted a drop in its charge-off rate that David Scharf, an analyst at JMP Securities, called impressive. JPMorgan’s charge-off rate and 30-day delinquencies both moved lower. And while Bank of America’s net charge-offs were higher, its delinquencies declined for the second-straight month.
Capital One shares were recently up 8.8% to $25.14. Earlier, they hit an intraday high of $25.64, the stock’s highest point since May. Alliance Data, meanwhile, jumped 10% to $41.64 recently, JPMorgan climbed 4.5% to $36.25, and Bank of America rose 3.7% to $13.39.
Shares of rival credit-card issuers American Express Co. (AXP) and Discover Financial Services (DFS) also rose. American Express was recently up 5.8% to $25.88, while Discover climbed 3.7% to $10.60. Carcache said, “the expectation is now that these issuers will also report an improvement in delinquency trends. Any issuers who disappoint will likely be under pressure.”
However, FBR Capital Markets believes the recent strength is seasonal and expects weak employment data will prompt delinquencies to return to a rise in July. “Losses may stabilize over the next several months, reflecting the decline in [delinquencies]; however, we expect losses to resume their increase in 4Q09, peaking in 1H10,” the firm said.
Fox-Pitt’s Carcache, meanwhile, said it appears that there is more than seasonality at play in the improved delinquency trends. “While accounts that have already gone bad continue to steadily roll through the various buckets to charge-off and future credit losses remain a major concern, the ability to contain early stage delinquencies bodes well for the future,” Carcache said, noting that delinquencies are considered the best leading indicator of future charge-offs.
JMP’s Scharf said it is easier for Alliance Data than other credit-card issuers to slow the percentage of charge-offs to total receivables because Alliance Data is constantly launching new programs, hiking the number of overall cards and thereby reducing the weight of the bad loans. “They have the ability to grow the denominator by ramping up entirely new card programs,” Scharf said. “That can depress the reported charge-off rate.”
This looks like a seasonal head fake similar to the oil rally and housing stability….
No, we know empirically that the consumer (at large) is very indebted. And it’s concentrated in a portion of the population which actually makes it worse than being more dispersed. IMO,there are a number of things that have given some cash flow relief recently that is driving this charge off easing.
The stimulus cash flow is helping.
Many homeowners have stopped paying their mortgages because they’ve given up on trying to keep the house, being so far underwater. But banks aren’t foreclosing on them in a timely manner. So those folks are paying down their other debts with that cash flow, not wanting to go into bankruptcy, but accepting that they’ll be foreclosed on eventually.
But these things won’t last. And with unemployment rising, hiring being anemic, along with wages being pressured downwards as well as the work week decreasing, the cash flow will continue to decrease and the charge offs and defaults will rise.
It’s the ugly truth. And no amount of hope will change it.
Onlooker, I agree. Consumers are still incredibly weak.
I totally cannot believe that Capital one has situation has under control. Wait for more unemployment. As I readsomewhere else(Hussman?), employment event is 1 of the 2 majorfactors that causes deliquencies in home loans.
Wait till there aremore job losses and more mortgage resets coming due next few months – lets c how thesecompanies handle!
Or may be we reduced our expectations – thats what it is! Lower the bar and we can meet allgoals!