COF Looks Ready to Ride Out a Recession

For some perspective, the average return on equity of the last 10 years has been 22%. Going forward, the average is unlikely to be that high, but normal is well north of 15% in my opinion. Don't forget that the diminution of the home equity loan as a financing source for consumers means more reliance on both credit cards and auto loans, Capital Ones's two main products.

Right now, credit metrics at Capital One are not really pointing to this added $650 million being anything other than conservative, though not exceedingly so. Managed charge-offs in U.S. cards are at 5.74%, up 40 basis points from November. Charge-offs for the fourth quarter should be 5.40%, which is not that far away from the 5.25% guidance earlier.

Delinquencies rose 2 basis points from November and are up about 40 basis points from the third quarter. Auto did show an 82-basis-point increase from November, but much of that is seasonal. Charge-offs were only up 4 basis points in November, to 4.04%.

No doubt, all of these are going higher through most of 2008, but if an investor is not willing to make a decision as to when the price is more than discounting the worst case and act on it, much of any upturn is stock price will be missed.

Obviously the focus of the call will be management's comments on the credit outlook.

---

At the time of publication, Thomas was long Capital One.