Fewer Stiffs Using Capital One Plastic as Card Defaults Drop

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Capital One CreditCapital One's (COF) credit card charge-off rate -- the percentage of debt that it's unable to collect -- fell to 4.97% in April this year. That's the lowest default rate for the company since 2007. Capital One is the fourth largest issuer of credit cards in the U.S., with around $65 billion as outstanding credit card loans. It competes with JPMorgan (JPM), Bank of America (BAC), Citigroup (C) and American Express (AXP) in the credit card business.

The credit card business is the largest source of value for Capital One and constitutes 71% of our $60.65 stock price estimate for the company, which is roughly 20% above the current market price.


In April, Capital One wrote off $224 million as bad debt or roughly 4.97% of balances on an annualized basis, down from $248 million or 5.87% the previous month.

One of the reasons for the decline in charge-offs is stricter regulation on the banking industry triggered by the global economic crisis. Banks have also become more conservative in their lending standards and are avoiding giving loans where default risks are high. The industry wide charge-off rate peaked at 10.9% in March 2010, but has declined ever since. The current charge-off rate is still higher than 3.82% that the industry enjoyed before the recession.

We estimate the decline in charge-offs will bring down the provisions (as a percentage of total loans) to about 4.1% in 2011 from 5.1% in 2010. The delinquency rate, considered an indicator of potential defaults by customers, also dropped to 3.4% in April from 3.6% the previous month. This suggests that there is room for Capital One to decrease its provisions for bad loans to about 3.5% of total loans. Such a scenario would boost our $60.65 price estimate for Capital One's stock by about 10%.

See our full analysis of Capital One

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