DFS Discover Financial Services

Regulatory filings by major credit card companies for the month of May have shown a continuous declining trend in credit card defaults, with rates dropping to the pre-crisis level. On Wednesday, five of the nation's top six credit card companies reported a decline in card defaults.

While, Bank of America Corporation (BAC), American Express Company (AXP), Discover Financial Services (DFS), Citigroup (C) and Capital One Financial Corp. (COF) recorded further drop in their respective credit card defaults, JPMorgan Chase & Co. (JPM) reported a surge for the same.

Card companies usually write off the loans that are 180 days past due and assume them as uncollectible. For BofA, on an annualized basis, net charges-off (NCOs) went down to 8.03% in May as against 8.25% in April. Furthermore, this was significantly below 14.53% reported by the company in August 2009.

Similarly, on an annualized basis, Capital One’s NCOs fell 13 basis points from the prior month to 4.84% in May. This is the second consecutive month that the company’s NCOs have stood below 5% since late 2007. The NCOs of Capital One had climbed up to 10.87% in April 2010 before the downward trend started.

However, JPMorgan reported a slight increase in NCOs to 5.67% of its total loan balance in May compared with 5.60% in April. However, this is substantially lower than the peak of 10.91% recorded in January 2010.

Delinquency rate, indicating the future rate of default, plunged for BofA, JPMorgan and Capital One in the reported month. BofA’s delinquency rate for 30 days or more (on an annualized basis) dropped to 4.28% (lowest rate in more than four years) versus 4.52% in April 2011. For JPMorgan, delinquency rate for 30 days or more (on an annualized basis) inched down from 2.86% in April to 2.66% in May, marking the company’s lowest delinquency rate since August 2007.

Similarly, delinquency rate for 30 days or more (on an annualized basis) for Capital One slipped to 3.32% from 3.41% in April. The company’s delinquency rate for 30 days or more had peaked to 5.8% in January 2010.

Additionally, delinquency rates and NCOs also declined for American Express, Discover Financial and Citigroup.

One of the key reasons behind declining default rates is that the defaulting card holders are now not being able to get cards with large credit limits. Moreover, banks have already written off balances of those customers who are most likely to default. Also, the declining default trend is reflective of the card owners’ improved financial condition and ability to pay off their debts. This, in turn, is clearly indicative of the stabilizing economy.

Currently, Capital One retains a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating; JPMorgan, Discover Financial, Citigroup and American Express retain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating; and BofA retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.

 
AMER EXPRESS CO (AXP): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
CAPITAL ONE FIN (COF): Free Stock Analysis Report
 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
Zacks Investment Research