DFS Discover Financial Services

Yesterday, Discover Financial Services (DFS) reported a marginal rise in its delinquency rate for the first time since January 2010. However, as per the regulatory filing of the company, the default rate continued to fall, again reaching a new low since the beginning of the recession.

Discover reported a delinquency rate of 2.5% of balances on an annualized basis in September 2011, marginally up from 2.49% in August, which was the lowest rate since the recession. It reached the highest point at 5.72% in October 2009.

Delinquency rate is the rate of delay in payments by 30 days or more. It is normally an indicator of future default rates.

Meanwhile, Discover’s defaults continued to fall for the 18^th consecutive month since February 2010, reaching $45.8 million or 3.17% of balances on an annualized basis in September 2011.

The charge-off rate in August 2011 was 3.6%, while the highest charge-off rate for the company was 9.11% in February 2010. Credit card companies write off loans if they are overdue by more than six months.

While the upturn in Discover’s delinquency rate is too small to individually indicate a change in the 19-month trend of the company, industry trends indicate a change in credit card payment pattern.

Discover’s peer American Express Company (AXP) reported a delinquency rate of 1.5% in September 2011, up 10 basis points from 1.4% in August. However, the charge-off rate for the company declined to 2.6% from 2.7% in August.

Another peer, Capital One Financial Corp. (COF) reported delinquency and charge-off rates of 3.65% and 3.9%, respectively, in September from 3.43% and 4.10% in August.

While the increase in delinquency rates in all the companies is marginal, the industry-wide trend of higher delinquency in September 2011 indicates a downturn in customers’ financial situation and payment ability. The falling charge-off rates in September 2011 reflect the decline in delinquency rate in the prior months.

However, if the trend of decline in delinquency continues in subsequent months, payment defaults will also start rising. Coupled with the possibility of another recession, this trend is a cause of concern for card companies.

Meanwhile, the falling charge-off rates have led to a decline in the total card debt in US. As per the figures provided by the Federal Reserve, total card debt has declined by 19% since the highest point in September 2008. Apart from the payments made by card holders, the decline also includes the write-offs made by card companies since 2009, amounting to $75 billion.

Currently, Discover caries a Zacks #2 Rank, implying a Buy rating in the short term.

 
AMER EXPRESS CO (AXP): Free Stock Analysis Report
 
CAPITAL ONE FIN (COF): Free Stock Analysis Report
 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
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