Wednesday, April 15, 2009

Capital One: The Ticking Time Bomb

. Wednesday, April 15, 2009

By stockOzone team

In a regulatory filing on Wednesday, credit card lender and regional bank Capital One (NYSE: COF) said that the annualized net charge-off rate for U.S. credit cards -- debts the company believes it will never collect - rose to 9.33 percent in March from 8.06 percent in February.

The McLean, Virginia based company attributed some of the increase to lesser number of days in the month of February. Adjusted, the US card charge-off rate would have been 9 per cent in March.Capital One acknowledged that a deteriorating economy and sharp rise in unemployment is to be blamed for much of its woes.

It is indeed an alarming sign for the credit card industry as a whole as the general rule of thumb in the card industry is that default rates should match the national unemployment rate. Jobless rates hit 8.5% in March. Wall Street Journal reports that bankers at J.P. Morgan Chase & Co. (NYSE: JPM) and Bank of America (NYSE: BAC) had warned recently that the loss rates could exceed the unemployment rate in this severe downturn. American Express (NYSE: AXP) and Citigroup (NYSE: C) are already reeling under the impact of mounting losses at their credit card division.

Overall, 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 expects the charge-off rate to hit 10.5 per cent in the first half of 2010, assuming a peak in the unemployment rate of 10 per cent.

Capital One, which is scheduled to report first-quarter results on Apr. 21., anticipates more credit losses this year as cash strapped American consumers struggle with unemployment, which hit a 25-year high in March.

Capital One once specialized in credit cards but expanded into branch banking in recent years by acquiring Hibernia Corp and North Fork Bancorp Inc. In February it acquired Chevy Chase Bank, expanding its presence in the affluent suburbs of Washington, D.C.The company received $3.55 billion under the TARP program.The company has attracted the attention of various consumer groups and a congressional oversight panel for raising credit card interest rates and fees despite being a bailout recipient.

Disclosure: Author does not own any of the stocks discussed here.

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