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Is It Safe? Credit Card Trouble at Capital One

"Is It Safe?" is a daily feature by Ratings that looks at a company's risk-and-reward potential. Find out if your stocks are safe each morning at 4.

Capital One Financial (COF - Get Report) has been outrunning rivals for the past three months with a return of 92% versus 38% for the S&P 500 financial sector index. Even though it's outperforming and undervalued, the credit card company faces an uncertain future.

Since the start of the credit crisis, many have been expecting an avalanche of credit card defaults as consumers lose their jobs and struggle to repay loans. While that hasn't happened yet, Capital One warned earlier this week that charge-off rates were rising. Ratings

Capital One's highly geared balance sheet makes it especially vulnerable to charge-offs, loans deemed uncollectable. With about six times more debt than equity and credit cards providing 62% of sales, even a moderate decrease in card revenue would hurt profits.

The McLean, Virginia-based company's charge-off rate rose 85 basis points in the past month to 9.4%. It's faring better than American Express (AXP - Get Report), which has a charge-off rate of 10%, but lags behind the 8.3% rate at Discover Financial Services (DFS - Get Report).

Charge-offs occur when credit card loans go unpaid for 180 days, leading the company to write down the loan and interest. On that basis, today's charge-offs came from accounts that became delinquent in mid-December, before huge increases in joblessness. The amount of uncollectable loans will likely rise as the defaults of more recently unemployed customers reach the 180-day mark.

Capital One swung to a first-quarter loss of $111.9 million from a year-earlier profit of $548.5 million. The results follow a $1.42 billion loss in the fourth quarter.
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AXP $65.43 0.00%
BAC $14.56 0.00%
COF $72.39 0.00%
DFS $56.27 0.00%
JPM $63.20 0.00%


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