The report by Capital One on a marked increase in credit card chargeoffs to an eyepopping 9.33% is more significant than it might seem. First, the absolute number is simply a stunner in an economy where unemployment is far from peaking. Second, Capital One was widely regarded in the industry as a savvy credit card issuer, tightly run, with good credit models. Then again, I wonder if their reputation was in fact based on product design. In the days when just about every financial player was junking up my mailbox with credit card offers, Capital One’s were far and away the worst (small credit lines, most often with a requirement that you open a bank account with close to the amount of the credit line as your opening balance. And I never got much further, but I suspect those accounts had minimum balance requirements not much below that required to get the card.
Now I do not know if the offers I got was representative of their product line, but I was always a bit perplexed to get these offers, that would make sense only if you had a great deal of getting a credit card, since I have a good FICO and live in a high rent district. I would sometimes puzzle what mailing list I was on to get targeted for these offers.
The point of that story s that a chunk, probably a big chunk, of Capital One’s business was targeting higher risk borrowers, However, with credit card marketing so skewed to create borrowers dependent on credit, the industry set itself up for this outcome. Indeed, as we noted earlier, they became even more aggressive in pursuing weak borrowers in the wake of the 2005 bankruptcy act, assuming it would enable them to extract blood from turnips. Even American Express, heretofore also held in high esteem for the supposed sophistication of its credit scoring and management, and generally targeting affluent customers, is showing chargeoffs not much lower than Cap One (note these two issuers have released March stats, but industry averages for the month do not yet appear to be available)
Separately, however, while the level of Cap One’s pain may be a bit more acute than that of other credit card issuers, the bump up in losses will probably prove typical.
From the Financial Times:
Concerns over US credit card companies grew on Wednesday as Capital One Financial, a leading issuer, said its credit card loss rates were exceeding the unemployment rate.
Credit card writedowns have topped the jobless rate on a handful of occasions in the past, and only once by any significant margin. That was in 2005 as a flood of borrowers entered bankruptcy and wrote off their credit card debt before the passage of a law that made it harder to file for bankruptcy.
Credit card loss rates have in the past closely tracked the rate of unemployment. But in this recession that relationship is breaking down. Economists say this is because job losses, which pushed rates to 8.5 per cent in March, have compounded other sources of distress such as housing woes and stock volatility.
Meanwhile, as the recession has deepened, bankruptcy filings are once more approaching pre-2005 levels, contributing to the rate of credit card losses.
Capital One said its net charge-off rate for US cardholders – debts it believes it will never collect – rose to 9.33 per cent in March, up 1.27 percentage points in one month. It said some of the increase was because February has fewer days. Adjusted, the US card charge-off rate would have been 9 per cent in March…American Express …. reported that credit card losses of 8.6 per cent in March were offset by the sale to third parties of some previously written-off card loans.
Brian Shniderman, head of the US credit card practice at Deloitte, said job losses had a “ripple effect” on the credit card business as even consumers who still had jobs adjusted how often and how much they spent….
US credit card charge-offs soared in February to 8.82 per cent, a record in the 20-year history of Moody’s credit card index. Moody’s predicts the charge-off rate will peak at about 10.5 per cent in the first half of 2010, assuming a peak in the unemployment rate of 10 per cent.
16 comments
Comments are closed.
Moin from Germany,
that the stock has managed to close in the green despite the ugly news is clearly a sign that we are close to the top….
The following headline from American Express was good for a spike of almost 12 percet…..
American Express March Net Write-Off Rate Falls To 8.6%
American Express Co. (AXP) on Wednesday said its net write-off rate for loans was 8.6% in March, down from 8.7% in February.
The company also said for March that its 30 days past due loans as a percentage of total, or managed basis delinquency, fell to 5.1% from 5.3%.
For the New York company’s securitized cardmember loans, American Express said the net write-off rate rose to 8.8% for March from 8.6% in February, according to a filing with the Securities and Exchange Commission.
For the three-months ended March 31, American Express said its net-write off rate for loans, both owned and managed, was 8.5%, and its delinquency rate was 5.1%.
Yves,
I think you DID end up on the wrong target list. When I lived in the U.S. (2005-7), I received many Cap One offers, all without strings attached and with high credit limits. And I’m pretty sure my income was and is lower than yours ;-)
In fact, I STILL receive credit card offers to my in-laws house (which I use as a U.S. mailing adress(, even though I have not had ANY income since April 2007 – at least as far a s the U.S: credit bureaus know. Amazing.
f95kai,
Well, the other credit card solicitations did seem to see me in a better light. But I also managed to get on one very bizarre catalogue’s mailing list, which sold very kitschy stuff (like not well made German themed coffee cups) so however I got on that list may also have something to do with Cap One.
Did you notice footnote “C” in AXP’s filing?
http://sec.gov/Archives/edgar/data/4962/000110465909024289/a09-10199_18k.htm“(C) During March 2009 the Company sold to third parties certain cardmember loans that had been previously written-off. The net write-off rates reported above for March 2009 and the three months ended March 31, 2009, reflect the benefit of the sale proceeds being treated as a partial recovery of such previously written-off balances.“
So, the March 31, 2009 figure of 8.8% net write-off rate is not an apples to apples comparison with the 8.6% February 28, 2009 number.
Mrs. Wantanabe,
No, sadly I just about never have the time these days to read financial footnotes, which are inevitably illuminating. Great point.
Moin,
“So, the March 31, 2009 figure of 8.8% net write-off rate is not an apples to apples comparison with the 8.6% February 28, 2009 number.”
Thanks…
This makes the spike in the shares even more telling…..
I know this is a little off topic, but seems relevant in light of these write-offs.
No one seems to have a good handle on the psychological impact the TARP fiasco has had on the average consumer. The assumption is that people fear a drop in FICO or generally feel morally obligated to pay their debts, but every day they see more stories of people supposedly shirking their own obligations or taking on more. I wish we had data to see if this is demobilizing the gargantuan efforts required for the credit risky (a group growing in size constantly, though I have yet to see any hard numbers) to simply stay afloat.
If we thought the models which brought this on were flawed, this kind of subtle shift in public sentiment seems like it would uproot whatever other credit models are left. We only have anecdotal evidence, though the right-wing is in overdrive pushing revolution/revolt/oppression, the left already distrusted the big financial players, and the middle is made up of pragmatists like us who see how ridiculous the system has become.
Today someone on CNBC pointed out that investors like regularity of outcomes, i.e. the rule of law. I think this is insightful if only because Obama has filled the void with his charisma. It’s an open question how on earth he plans on restoring faith in a system he isn’t really changing. For as much as Wall St. dislikes Obama’s politics, if he can pull this off he’d be their Messiah.
Yves,
Definitely you were on the wrong mailing list. A few years back, I too was bombarded with offers from Cap One, but none required me to open a bank account. I eventually broke down one day and filled out their application, and received a platinum card with a nice 5-digit credit line, and a 12 month 0% cash advance offer. At the time I was not working, and my FICO score was OK but not stellar, albeit I was living in a somewhat ritzy neighborhood.
Amazingly, lately I’ve been seeing Cap One banners pop up on various internet sites, offering cards with low interest rates. Right now I am in Europe, and from a technological point of view, it’s would be extremely easy for them to determine that I am surfing the net from outside the US and thus not show me those banners, but obviously their ad agency is not smart enough to do that.
What can I say, they’re morons!
Vinny GOLDberg
Unrelated to the topic above, I was wondering if I was the only one who enjoyed reading inflammatory comments from otherwise brilliant readers who chose to retain some personal dignity under the cowardice of anonymity?…LOL
I’m asking because I’ve noticed that as of the past 2 days or so I can no longer post anonymous comments here. Also, the amount of comments seem to have dropped significantly lately. Is this the new reality we’ll have to live with?
Vinny GOLDberg
just another social scientist said… “No one seems to have a good handle on the psychological impact the TARP fiasco has had on the average consumer. The assumption is that people fear a drop in FICO or generally feel morally obligated to pay their debts, but every day they see more stories of people supposedly shirking their own obligations or taking on more.”
Here’s a link to an excellent lecture that speaks of neuroeconomics and explores how people behave depending on whether they have a positive or pessimistic worldview, positive defined as the belief they are predominately playing with heroes who are out to give them a fair shake and pessimistic defined as the belief they are overwhelmingly playing with villians who are out to screw them.
http://thesciencenetwork.org/programs/beyond-belief-candles-in-the-dark/erin-o-hara
O’Hara says this perspective on the world “has a priming effect” that influences how we behave or interact with others.
For the past 30 years the United States has engaged in an orgy of selfishness, this behavior given a patina of legitimacy by the pseudoscience promoted by the likes of Ayn Rand and Richard Dawkins. If this trend is not reversed, if there is not a moral and legal reawakening so that selfishness and free-riding once again become things of opprobrium and illegality, and not adulation and legal sanction, at what point does a pessimistic worldview become ubiquitous, as has happened in Mexico, and the U.S. slips into the same type of chaos that Mexico is now experiencing?
I actually had a Capital One card years ago. All I can say is, if they go broke, I would gladly dance on their grave.
In the consumer bankruptcy cases I file, it’s not unusual for me to see two or three Cap One cards issued to the same borrower. What’s in your wallet, indeed.
DownSouth, you do make a valid point that over the past 30 years the US has slid deeper into narcissism, selfishness, and self-aggrandizing than ever before. However, as a shrink who has had the opportunity to observe closely Americans as well as Europeans, I often find myself drawing comparisons between the two continents.
My impression is that while many (but not the majority) of Americans have become materialistic and self-centered, the vast majority of Americans retained a healthy sense of community, charity, and social responsibility.
Conversely, over the past decade or so I have observed Western Europe embrace a spirit of self-righteousness bordering on the perverse, and a passive-aggressive nastiness that is truly creepy. What is particularly troubling about many Western Europeans, especially when it comes to their relationship to America, is their excessive amount of internalized envy. And envy is a truly dangerous emotion. Speaking from a psychological theory perspective, for most of the 20th century, Europeans exhibited the psychological mechanism of “idealization,” however that has now morphed into “devaluation” or the more insidious “projective identification” of America ad other nations.
In my assessment, one big difference between Americans and Europeans is that the Americans are far more ready and willing to engage in critical self-analysis. Therefore, I think Americans are more amenable to change. On the other hand, Europeans, in their near saint-like self-assessment don’t think they need to look inside, introspect, and change. Therefore, I expect the self-righteousness, envy, and, to put it simply, the rotting of the European soul qill continue unabated. Honestly, I feel a little creeped out by Europe, because I know what lies beneath the thin polish of civilization Europeans have learned to fake in order to attract tourists and thus keep their otherwise unsustainable and unproductive economies afloat. However, it’s fair to add that there are exceptions, such as Germany, a nation that is not unproductive and also has gone through sincere soul-searching since WW2. In fact, psycho-socially speaking, the Germans have more in common with the Americans than with the rest of Europe.
Vinny GOLDberg (wrapping up yet another satisfying day of Euro bashing :)
VG Chicago said…”My impression is that while many (but not the majority) of Americans have become materialistic and self-centered, the vast majority of Americans retained a healthy sense of community, charity, and social responsibility.”
I sure hope you’re right.
A lot of rich folks do a great job of figuring out reasons why injustice and inequality are the natural order of things. Up until a couple of hundred years ago, it was religion that was used to affirm this “natural” order. But now that the age of Enlightenment has dawned, it’s science.
Injustice and inequality? Sure they exist. But the human animal is a flesh and blood embodiment of lust, greed and selfishness. This is pre-determined by our genes, nothing can be done about it, and any efforts to do so are mere exercises in futility.
At least that’s the world accoring to the New Athists like Ayn Rand, Richard Dawkins and followers.
But this take on human nature is increasingly coming under fire. More than 20 years ago Amitai Etzioni began the assault when he published his book The Moral Dimension: Toward a New Economics. Despite the fact that his argument made imminently good sense and was exhaustively researched and documented, it gained little traction.
This is probably so because the outlook of the New Atheists serves the vested interests of powerful economic actors, and those actors have spent lavishly to foster and encourage that outlook. But the tide now seems to be turning. Not only has the ideology informed by New Atheism—libertairanism–proven to be an economic and social disaster, but new empirical evidence is accumulating rapidly in the fields of biology, genetics and neurology that runs counter to the underlying assumptions of the New Atheistic creed. As is always the case, the amount of evidence needed to overturn a perspective, whether it be religious or scientific, that serves the interests of a ruling elite is nothing less than overwhelming. But we seem to be approaching that point.
Jonathan Haidt does a great job of framing the issue and the debate and providing a short history of how it has played out within the scientific community:
For a long time there was a consensus that emerged beginning in the 1960s that human cooperation can be explained so parsimoniously just by these two beautiful simple processes: kin selection…and reciprocal altruism… And that’s all we need is just these two. This consensus had a kind of, almost a quasi-religous aspect to it in that people who challenged it, people who tried to produce or talk about other processes were often treated as though they were committing a kind of sacrilege. There was almost an emotional response, a rejection of people who tried to bring in other processes…
But in, just in recent years, in the last 10 or so years…things have changed. The consensus has unraveled and there’s an increasing appreciation that natural selection really does work at multiple levels at the same time and then the question is what are the factors that make inter-group vs. inter-individual competiton more or less important. The basic dynanic that’s been recognized since Darwin is that group efforts, cooperative efforts are always threatened by free riders, by people who reap the benefits of cooperation without making any contribution. This problem was thought to be fatal in the 60s but what has now been realized… is that culture is a solution to the free rider problem. Cultures are extremely good at solving free rider problems. Cultures come up with all kinds of mechanisms. We have abilities to gossip, we have institutions and practices that help us gossip efficiently, text messaging and the internet nowadays. But the gossip has been around for quite a long time, all sorts of religous practices, legal practices, all sorts of institutions help us ferret out free riders and make free riding costly.
And once free rider problems are solved, and this is true for any species or at any level, once free rider problems are solved and you create a new one-for-all, all-for-one dynamic, you then get a major transition in evolutionary history. Big changes happen because of the enormous gains from cooperation.http://thesciencenetwork.org/programs/beyond-belief-candles-in-the-dark/jonathan-haidt-1
Our culture in the United States is now in the process of dealing with free riders, the biggest culprits being bankers and financiers who have taken immensely from the society and given nothing in return. If the culture buys into the science of the New Atheists, then their prediction that nothing can be done about free riding will undoubtedly come true. Their reasoning is, after all, circular and self-fulfilling. If, on the other hand, the culture embraces the dissident science of those like Haidt, Pete Richardson and Rob Lloyd, then the culture will set about to “ferret out free riders and make free riding costly.”
In my opinion, the outcome will depend on the moral and cultural condition of the nation. So I hope you are correct in your assesment that a majority still have a “healthy sense of community, charity, and social responsibility.”
In my opinion, the outcome will depend on the moral and cultural condition of the nation. So I hope you are correct in your assesment that a majority still have a “healthy sense of community, charity, and social responsibility.”I think you’re focusing in on the correct macro phenomenon, but that you’re also simplifying it a bit. Sans Marx, sans Rand, and sans God, there are self-interested behaviors which I expect to interact with the current crisis in a dynamic way.
Tocqueville long ago made the argument that Americans were unique in how they went about collective behavior. Individual behavior was self-interested, sure. At the same time participation in social/political organizations was not just based on need (i.e. protection from the State of Nature), but also on a belief in the overall project of the community in and for itself. This was the mystical property of popular action which made Tocqueville so fascinated with our political system.
I don’t know if this is actually the paradox which propelled the US into its place as the perennial hard-working, optimistic, self-reliant society. What I do know is that culture doesn’t exist in a vacuum, and that there’s a disturbing uncertainty as to who will be able to define American culture in a way that mobilizes a significant portion of the country. The traction being gained on the libertarian, anti-tax, Obama-wants-to-take-my-guns crowd gives me some serious heartburn for this very reason.
Exhibit A: Tom DeLay on Texans’ right to secede from the Union given Obama and Democrats’ actions.
capital one has adopted a low line / high utilization strategy within the card business. they want borrowers to have very small credit lines that are 60-80% utilized each month.
that way, they are primarily exposed to loss frequency, as opposed to severity.
MBNA and other card issuers on the other hand, are known for a high line / low utilization strategy. they have much more volatility in their results, since when a borrower goes bad, the utilization rate usually spikes from 30% to 100%. (indeed, that spike in utilization is usually a leading indicator of looming default).
a 9.3% charge off rate for COF at this phase of the cycle is not unreasonable. unemployment is pushing 9% and there’s a near 1:1 relationship historically.
the more interesting question is how amex managed to make their rate look so good. they sold off a bunch of DQ receivables in March, so that may have something to do with it. it also could be their customer base.
within the card industry, the consensus is that Discover has the best fundamental credit position, followed by JPM and COF. JPM has slightly lower charge offs that COF because they skew more prime. but, COF has an all-in finance yield that is 300bps higher than JPM. this more that compensates them for the incremental risk they take on at the low end.
AXP took a lot of risk at the peak of the cycle and has a lot of wood to chop before this credit cycle is over. it happens every cycle (remember the optima card) and this one will be no exception.
the two looming basket cases are Citi and Bank of America/MBNA. high line / low util strategies directed towards 680 FICOs = adverse selection. peak losses there will negatively surprise.