With the market nervous that Capital One ( COF) has a problem with bad loans, investors are paying close attention to credit-quality numbers that the credit card lender releases each month. November's bad-loan numbers were taken on Wall Street as mildly disappointing, prompting a brief selloff. But the data would have looked considerably worse, and the stock's decline much steeper if Capital One hadn't added an extraordinarily large amount of new loans to the off balance sheet entity that reports the credit-quality data. Any indications that Capital One's bad loans might exceed company expectations could punish the company's stock. After years of meteoric growth, the Falls Church, Va., lender has suffered through an unkind 2002. Credit-quality fears have proven hard to dispel as bad-loan numbers have crept higher in the lackluster economy. In July, Capital One announced that the Federal Reserve and the Office of Thrift Supervision had asked it to enter an "informal memorandum of understanding" -- effectively a request by the regulators that Capital One address issues that concerned them. It was then that Capital One revealed for the first time that 40% of its loans were to people with poor or patchy credit histories. And last month, Detox suggested that a crackdown by regulators would hurt Capital One's fee revenue, a key measure because that type of income is practically pure profit. Its stock, down 41% this year, fell 32 cents to $31.93 Tuesday.
Hawthorne and Briar
Like most credit card lenders, Capital One sells a large proportion of the loans it makes to investors. It transfers the loans to an off balance sheet trust that issues bonds that are backed by the loans. Capital One makes money if the interest paid on these bonds is less than the income from the loans after bad-loan losses and other costs. These trusts are required by regulators to report each month how many of their loans are in default or are past due. There are about $28 billion of loans in the Capital One Master Trust, about the same as the company holds on its balance sheet.