On Nov 15, 2013, major credit card processing companies,
American Express Co.
Discover Financial Services
) reported a change in charge-offs and delinquency rates for the
month of October. However this news failed to pull up the share
prices of either of the companies owing to broader market
Card companies usually write off the loans that are 180 days past
due, assuming those as uncollectible. Such credit card defaults
or net charge-off (NCO) rate witnessed a decline for both
Discover Financial and American Express last month. While
American Express' write-off rate for October 30 days past due
loans reported favourable results, declining 10 basis points to
1.5% from 1.6% in the last month, Discover Financial's charge-off
rate for the same period was also encouraging as it declined 17
basis points to 1.56%.
Delinquency rate, indicating the future rate of default (future
charge-offs), stood at 1.1%, flat with that of Sep 2013 numbers
for American Express. However, delinquency rates for Discover
Financial increased 4 basis points from Sep 2013 to 1.59% in Oct
2013, reflecting poor credit quality going forward. This
deterioration reflects the delayed payments on their loans.
Performance So Far
For Discover Financial the credit card net charge-off rate
improved 40 basis points year over year to 2.25% in the first
nine months of 2013. As of Sep 30, 2013, delinquency rate over 30
days past due fell 12 basis points from 1.79% at year end 2012 to
1.67%. However, the recent increase in delinquency rate,
reflecting poor credit performance, might soften Discover
Financial's growth in the upcoming period.
On the other hand, American Express' net write-off rate improved
26 basis points to 1.08% in the first nine months of 2013 while
delinquency rate improved 14 basis points to 1.10%. Improved
credit quality should drive American Express' fundamental growth
Improvement in delinquency and net charge-off rates implying
an improved credit quality also enhances liquidity that helps a
company to efficiently deploy capital. During the third quarter
Discover Financial repurchased 7 million shares for $350 million
while American Express repurchased 13 million shares for $971.5
million. However the present drag in delinquency rates might
weigh on bottom-line growth of both the companies going
Delinquency rates also increased at
JPMorgan Chase & Co.
Capital One Financial Corp.
) for the month of October. While delinquency rate increased 3
basis points from Sep 2013, to 1.60% for JPMorgan, Capital One
Financial suffered an increase of 8 basis points from the last
month to 3.54%.
Both Discover Financial and American Express currently carry a
Zacks Rank #2 (Buy).
AMER EXPRESS CO (AXP): Free Stock Analysis
CAPITAL ONE FIN (COF): Free Stock Analysis
DISCOVER FIN SV (DFS): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
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