Point and Laugh at Capital One (COF)

Point and Laugh at Capital One

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I got excited when American Express (NYSE: AXP ) showed big improvements in the quality of its credit card portfolio last week. Maybe the credit card industry was turning a corner? Maybe the American consumer wasn't as beaten down as assumed? Maybe? Maybe?

No such luck, Fools. The excitement lasted about 20 minutes, until I saw Capital One's (NYSE: COF ) earnings.

Net income for the third quarter came in at $425.6 million, or $0.94 per share, compared with $374.1 million, or $1.00 per share, in the same period last year. That headline number pleased investors, who bid up shares almost 7% on Friday. Chalk that up to a market that expects nothing great, because digging a little deeper tells the story of a bank still very much under attack from mean ol' Mr. Recession:

Metric	Q3 2009	Q2 2009	Q3 2008
Credit Card 30-Day Delinquencies	5.53%	4.99%	4.34%
Credit Card Net Charge-Off Rate	9.59%	9.24%	6.10%
Total Purchase Volume	$26.0 billion	$25.7 billion	$29.4 billion

The increase in both early stage delinquencies and net charge-offs is in stark contrast to the sequential improvements put up by American Express last week. Bank of America (NYSE: BAC ) , which holds the honor of the highest credit card default rate among major peers, also experienced sequential declines in delinquencies in the third quarter -- a great sign when it comes to future losses. Deceleration in the unemployment rate and the "wealth effect" of rising equity markets seemed to be helping some lenders ever so slightly. But Capital One? It's still surrendering to the powers of a hungover U.S. consumer.

Granted, other banks like JPMorgan Chase (NYSE: JPM ) experienced increases in early stage credit card delinquencies, too. But balance-sheet diversification makes that weakness almost negligible. Capital One has fully half of its eggs in the credit card loan basket. When you're that reliant on one segment, you'd better be darn sure that segment has enough oomph to stay competitive with peers. Yet its only heavily card-focused rival, American Express, is quickly proving to be in a different league when it comes to credit quality. American Express is in recovery mode. Leaving the darkest days in the past. Already healing from the Great Recession.

Where's that leave Capital One? Prone to being pointed and laughed at, I'd say.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. American Express is a Motley Fool Inside Value selection. The Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On October 26, 2009, at 1:38 PM, IraqScott wrote:

The best way to avoid any losses is to just no issue any loans..but alas there is the other side of profits. Revenue. Why are people obsessed with the one side of the equation and not the other. I'll take 20% default rates if you make enough revenue to offset the losses.
Report this Comment On October 26, 2009, at 2:06 PM, FredricksTutu wrote:

After 25 years of use, I cancelled my Amex gold card last week.
I also transferred the balance on my optima card and cancelled that too.
AMEX is punishing is customers because AMEX mis-managed it's business. They eliminated my preffered rate so I transfered the balance to another card with a better rate.
Capital One rewards my responsible use of credit by providing me with a low interest rate. Capital One Visa cards are accepted everywhere and have no annual fee.
What's the point in an Amex Card?
Report this Comment On October 26, 2009, at 2:53 PM, ScottCFA wrote:

I'll have to point and laught at Morgan Housel if you really believe that AMEX is somehow way ahead of Capital One (COF). Both companies reported Q3 earnings that were of questionable quality due to favorable nonrecurring items.
AMEX's chargeoffs are still slightly higher than COF's even though you are correct that the two companies headed in the opposite direction sequentially. COF's results were worsened by a regulatory change that didn't affect AMEX.
The bigger point is that AMEX should have lower chargeoffs and delinquencies every step of the way. If they were really superior operators, wouldn't AMEX's goldplated customers pay their bills promptly, or at least make the minimum payment if they revolve? Why were they behind a supposedly subprime lender like COF then?
Report this Comment On October 26, 2009, at 3:28 PM, AverageJoe11 wrote:

This site has been anti-Capital One for as long as I can remember. The stock was getting knocked at $10 a share then $15 then $20 then $25 then $30 then $35 and now at $40, yet this site continues to slam Capital One. I think it is time to admit that Capital One is a bit stronger in its' financials then the people at Motley Fool would like to believe and that the value is relatively fair right now. I see Capital One continuing to trade in the $38-$42 range for awhile before eventually moving up to the $45-$50 range sometime Q2 of 2010.
Everything I read about Capital One from this site is slanted and one sided and therefore not believable. There are other things to consider such as NACO and NIAT that are just as important as charge off rate. Capital One has been one of the only credit card companies to actually turn a profit and will continue to get my money!
Report this Comment On October 26, 2009, at 3:35 PM, AverageJoe11 wrote:

Oh and Morgan, I just read your article from July of 2009 when you were slamming Capital One. Since then, the stock has climbed steadily from $26 to $40. Might be time to drop the bias and rethink your comments!

updated 2 hours ago Sponsored by:
	DOW	12,890.46	6.51	0.05%
	S&P 500	1,351.95	1.99	0.15%
	NASD	2,927.23	11.37	0.39%

COF	$49.10		+0.72	+1.49%
Capital One Financ…		CAPS Rating:

JPM	$37.86		-0.44	-1.15%
JPMorgan Chase & C…		CAPS Rating:

BAC	$8.18		+0.05	+0.62%
Bank of America Co…		CAPS Rating:

AXP	$52.31		+0.67	+1.30%
American Express C…		CAPS Rating:

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Point and Laugh at Capital One

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Comments from our Foolish Readers

Report this Comment On October 26, 2009, at 1:38 PM, IraqScott wrote:

Report this Comment On October 26, 2009, at 2:06 PM, FredricksTutu wrote:

Report this Comment On October 26, 2009, at 2:53 PM, ScottCFA wrote:

Report this Comment On October 26, 2009, at 3:28 PM, AverageJoe11 wrote:

Report this Comment On October 26, 2009, at 3:35 PM, AverageJoe11 wrote:

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