Discover's Delinquency Up Slightly - Analyst Blog
October 18 2011 - 12:19PM
Zacks
Yesterday, Discover Financial Services (DFS)
reported a marginal rise in its delinquency rate for the first time
since January 2010. However, as per the regulatory filing of the company, the
default rate continued to fall, again reaching a new low since the
beginning of the recession.
Discover reported a delinquency rate of
2.5% of balances on an annualized basis in September 2011,
marginally up from 2.49% in August, which was the lowest rate since
the recession. It reached the highest point at 5.72% in
October 2009.
Delinquency rate is the rate of delay in payments by 30 days or
more. It is normally an indicator of future
default rates.
Meanwhile, Discover’s defaults continued to fall for the
18th consecutive month since February 2010, reaching
$45.8 million or 3.17% of balances on an annualized basis in
September 2011.
The charge-off rate in August 2011 was 3.6%, while
the highest charge-off rate for the company was 9.11% in February
2010. Credit card companies write off loans if they are overdue by
more than six months.
While the upturn in Discover’s delinquency rate is too small to
individually indicate a change in the 19-month trend of the
company, industry trends indicate a
change in credit card payment pattern.
Discover’s peer American Express Company (AXP)
reported a delinquency rate
of 1.5% in September 2011, up 10 basis points from 1.4% in August.
However, the charge-off rate for the company declined to 2.6% from
2.7% in August.
Another peer, Capital One Financial Corp. (COF)
reported delinquency and charge-off rates of 3.65% and 3.9%,
respectively, in September from 3.43% and 4.10% in August.
While the increase in delinquency rates in all the companies is
marginal, the industry-wide trend of higher delinquency in
September 2011 indicates a downturn in customers’ financial
situation and payment ability. The falling charge-off rates in
September 2011 reflect the decline in delinquency rate in the
prior months.
However, if the trend of decline in delinquency continues in
subsequent months, payment defaults will also start rising. Coupled
with the possibility of another recession, this trend is a cause of
concern for card companies.
Meanwhile, the falling charge-off rates have led to a decline in
the total card debt in US. As per the figures provided by the
Federal Reserve, total card debt has declined by 19% since the
highest point in September 2008. Apart from the payments made by
card holders, the decline also includes the write-offs made by card
companies since 2009, amounting to $75 billion.
Currently, Discover caries a Zacks #2 Rank, implying a Buy
rating in the short term.
AMER EXPRESS CO (AXP): Free Stock Analysis Report
CAPITAL ONE FIN (COF): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
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