In an 8-K release this morning, Capital One Financial Corp. (NYSE: COF) reported a 13.7% increase in the monthly charge off rate for the U.S. card segment as compared to the December, 2007 report. As has been predicted, global credit card debt has been rising at an alarming rate. The most recent announcements of a 40% workforce reduction for Capital One's U.K. unit once again displays how "predatory lending practices" have now come back to haunt those companies that have been playing with financial-fire. As the Capital One Management was working on keeping credit card customers, they did not realize that that same level of loyalty would eventually come back to bite them in the asterisk. (Chart from 2007 COF Investor Conference)
Now, as the "almost-affirmed" recession is upon us, delinquencies will rise along with foreclosures and bankruptcies. This will surely trickle down to the lenders as the inflows they receive dwindle, outflows grow and non-recoverable debt increases. While a 6% rate may seem historically high, back in 2003, Capital One posted rates closer to 8% as the U.S. was starting on the road to recovery from a difficult 2 years of recession and the fall off from the domestic stock markets averaging near -50%. The same predicament is what lies ahead as the stock market losses are substituted by housing losses. Even though property values may appear to be "on paper" the physiological wealth effect (or is it defect?) still hurts consumer confidence. All of this leads us back to an ever increasing problem with consumer credit.
Whether it is that consumers are not spending, food prices are increasing, job losses are mounting or markets are in utter disarray; companies that rely on revenue from consumer-generated debt are going to suffer. Net Principal Write-Offs for Month Ending March, 2007
- U.S. Card - $271,412
- Auto - $ 84,482
- Global Fincl Svcs.- $ 115,516
- Total Write-Offs (March 2008): $508,083,000
Andrew Horowitz, is a money manager and author of The Disciplined Investor. He discusses COF in the most recent episode of The Disciplined Investor Podcast
Disclosure: Horowitz & Company clients are SHORT COF as the date of publish.