Discover, AmEx Delinquency Falls - Analyst Blog


On Tuesday, card companies Discover Financial Services ( DFS ) and American Express Company ( AXP ) reported reduced delinquency rates for the month of December 2011.

Delinquency rate is the rate of delay in payments by 30 days or more. It is normally an indicator of future charge-offs.  Card companies usually write-off loans when they are in default for six months from the due date.

Discover recorded delinquency of 2.32% of balances, down 11 basis points (bps) sequentially and a substantial 159 bps year over year. Meanwhile, AmEx witnessed a 1.4% delinquency rate, down 10 bps sequentially and 70 bps from December 2010.

Besides, AmEx reported a decline in its charge-off rate to $53.7 million or 2.3% of balances on an annualized basis in December from 2.4% of balances in November and 4.1% of balances in December 2010.

On the flip side, Discover reported an acceleration in charge-offs to $46.4 million or 3.15% of balances on an annualized basis from 3.04% of balances in November. Nevertheless, the charge-off was substantially lower than 5.94% in December 2010.

Discover's delinquency rate reached the highest point of 5.72% in October 2009, while the highest charge-off rate of 9.11% was experienced in February 2010. AmEx's record of highest charge-off beats Discover's at 10.4% in April 2009, although its highest delinquency was marginally better than Discover's at 5.3% in February 2009.

The declining delinquency of both the companies bodes well for the future as the defaults in future are likely to be lower. AmEx usually has a better delinquency and charge-off rate compared to its peers as its clientele is comparatively well heeled.

Currently, AmEx carries a Zacks #3 Rank, which translates into a short-term 'Hold' rating. Discover carries a Zacks #2 Rank, implying a 'Buy' rating for the near term. Based on the fundamentals, we maintain our long-term 'Neutral' recommendation on both the stocks.

AMER EXPRESS CO ( AXP ): Free Stock Analysis Report
DISCOVER FIN SV ( DFS ): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: AXP , DFS

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