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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerCapital One Financial Corp. (NYSE: COF) -- Shares in credit card giant Capital One have fallen around -12% over the past month on news that some customers are having a tough time making payments on their accounts.
Credit card charge-offs -- loans that were written off completely as bad debts -- increased from an average of 2.86% in the third quarter to 3.28% in October. Meanwhile, delinquent accounts -- a measure of the percentage of loans overdue by more than 30 days -- rose from 3.7% in September to nearly 4.9% in October.
The company went on to announce that the situation was worse in some markets, particularly those that saw the biggest increases in real estate prices during the last housing boom. Taken together, these metrics suggest that Capital One is seeing some spillover from the weakening housing market and the inability of some consumers to access credit via home equity loans.
If you are interested in more analysis from Paul Tracy, you can find it at StreetAuthority.com
Clearly, a weakening of the firm's credit portfolio isn't exactly great news. However, by historical standards, delinquent loans and charge-offs remain relatively low and under control. And the company has taken some important steps to reduce future risk, most notably deciding to exit the mortgage business by writing off the value of its former GreenPoint Mortgage unit.
Another factor reducing Capital One's risk profile is the firm's acquisition of New Orleans-based Hibernia and other regional banking chains -- deposits from retail banking customers are a readily available and low-cost source of capital for funding.
The company also remains firmly focused on shareholder value, recently promising to distribute one-fourth of its after-tax earnings as dividends in 2008. Plus, the firm's free cash flows should leave room to conduct further share buybacks.
Finally, much of the bad news is priced into the shares at this point. The company trades at just 7 times forward earnings and has a long-term growth rate of close to +11% -- meaning the shares are trading at a significant discount to future growth. Capital One is also valued at just 0.8 times book value, a very attractive level for a financial firm.
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Reader Comments (Page 1 of 1)
11-20-2007 @ 11:37PM
Fungi said...
Capital One didn't "exit the mortgage business" by selling GreenPoint Mortgage, just a part of it. It still does mortgages through its Capital One Home Loans division -- a fact easily confirmed from visiting the company's public website or reviewing its filings.
In other words, it's not just delinquencies and charge-offs; there's still mortgage exposure beyond them thar hills.