Credit card issuers are surging today as they released data that was better across the board. Perhaps consumers aren’t as indebted as we believe. From the WSJ:
Shares of Capital One Financial Corp. (COF), Alliance Data Systems Corp. (ADS), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) rose Wednesday after they released better-than-expected delinquency and charge-off data for their credit-card businesses in June.
Capital One’s data showed that 30-day delinquencies, on a weighted average across its national lending business, declined in June from May. Its weighted average for national lending charge-offs – loans it doesn’t think are collectible – did rise from May but was lower than expected. The results “strengthen our view that the industry’s efforts to get delinquencies under control are producing favorable results,” Fox-Pitt analyst Bill Carcache told clients in a Wednesday note.
The results seen across a number of other credit-card issuers also supported that view. Alliance Data, known for its private-label cards, posted a drop in its charge-off rate that David Scharf, an analyst at JMP Securities, called impressive. JPMorgan’s charge-off rate and 30-day delinquencies both moved lower. And while Bank of America’s net charge-offs were higher, its delinquencies declined for the second-straight month.
Capital One shares were recently up 8.8% to $25.14. Earlier, they hit an intraday high of $25.64, the stock’s highest point since May. Alliance Data, meanwhile, jumped 10% to $41.64 recently, JPMorgan climbed 4.5% to $36.25, and Bank of America rose 3.7% to $13.39.
Shares of rival credit-card issuers American Express Co. (AXP) and Discover Financial Services (DFS) also rose. American Express was recently up 5.8% to $25.88, while Discover climbed 3.7% to $10.60. Carcache said, “the expectation is now that these issuers will also report an improvement in delinquency trends. Any issuers who disappoint will likely be under pressure.”
However, FBR Capital Markets believes the recent strength is seasonal and expects weak employment data will prompt delinquencies to return to a rise in July. “Losses may stabilize over the next several months, reflecting the decline in [delinquencies]; however, we expect losses to resume their increase in 4Q09, peaking in 1H10,” the firm said.
Fox-Pitt’s Carcache, meanwhile, said it appears that there is more than seasonality at play in the improved delinquency trends. “While accounts that have already gone bad continue to steadily roll through the various buckets to charge-off and future credit losses remain a major concern, the ability to contain early stage delinquencies bodes well for the future,” Carcache said, noting that delinquencies are considered the best leading indicator of future charge-offs.
JMP’s Scharf said it is easier for Alliance Data than other credit-card issuers to slow the percentage of charge-offs to total receivables because Alliance Data is constantly launching new programs, hiking the number of overall cards and thereby reducing the weight of the bad loans. “They have the ability to grow the denominator by ramping up entirely new card programs,” Scharf said. “That can depress the reported charge-off rate.”
This looks like a seasonal head fake similar to the oil rally and housing stability….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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