The financial sector spiked higher after Pfizer's (NYSE: PFE) positive COVID-19 vaccine data was announced. And credit-card-focused bank Capital One ( COF 2.85% ) was one of the biggest movers. In this Fool Live video clip from our Nov. 16, 2020 "Industry Focus" show, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why Capital One could be one of the biggest winners of a COVID-19 vaccine becoming available.
Matt Frankel: Capital One generally has a pretty high level of reserves. In normal times, they have more set aside for losses than their net charge-off ratios. The 2.7 percent of their loan portfolio was just set aside to cover losses.
Jason Moser: That's the nature of the product that they're selling though. Credit card's far different than a mortgage. It seems like that's going to be always the case even in the best of times.
Matt Frankel: For sure. Right now, they have 6.5 percent of their entire loan portfolio set aside to cover losses, including 11 percent of their credit card portfolio. So they could not collect 11 percent of their outstanding credit card loans and they have the money in the bank to cover it. That's pretty impressive, and worth mentioning, their net charge-off ratio actually went down in the third quarter. A lot of that has to do with stimulus holding the economy up, things like that. We'll see what happens now that congress can't get it's act together and agree on a stimulus. But so the net charge-off ratio is actually about three-and-a-half percent right now and they're setting aside enough for 11 percent in the credit card business. If this holds out, that's going to be a big reserve release too. It works both ways.
Jason Moser: Yeah.
Matt Frankel: They set aside a ton of money, but then if losses don't happen, they get to give some of that back to investors. They are well-capitalized and well-prepared for losses is the short version of all that.
Jason Moser: That's what you want to hear. I mean, that's definitely much want to hear, particularly when you're tied to cards as they are. Let's talk a little bit about today's big headline what we were talking before taping regarding Moderna (NASDAQ: MRNA) and the headline that came out this morning. Preliminary data from a Phase III trial shows that its coronavirus vaccine is more than 94 percent effective in preventing against COVID-19. This is something the CEO Stephane Bancel, I hope I'm pronouncing her name correctly, called a game-changer. We were talking about how this string of vaccine news is certainly being received very well by the real estate market. I mean, a company like Capital One, why is the vaccine such a positive catalyst for a company like Capital One?
Matt Frankel: Well, you want unemployment to return to normal as soon as possible, especially if you're a credit card lender. High unemployment means higher than average default. The second and third quarter, banks and credit card companies have been really good about letting people suspend their payments if they want to, there's been some stimulus going on, things like that, so we really haven't seen the effects play out yet. The ideal scenario is that the vaccine will be available, life will essentially return to normal, unemployment will normalize before we start seeing a giant wave of people running out of money to pay their bills.
Jason Moser: Yeah.
Matt Frankel: That's the big hope when you see this vaccine news. When it comes to banks and credit card heavy banks like Capital One in general, is that you want the economy and life as we knew it to return, essentially unemployment as we knew it to return especially before people start running out of money. Unemployment rate in the four to five percent ballpark would be great news for Capital One. The sooner we get a vaccine, the sooner we are going to get there.