Here's another one. I really hate this POS
Detox
Gangbusters Growth Veils Capital One Warts
By Peter Eavis
Senior Columnist
09/11/2003 07:02 AM EDT
Capital One (COF:NYSE)
BEARISH
Price: $58.91 | 52-Week Range: $24.91-56.30
A sudden growth spurt impresses investors.
But credit-quality measures remain spotty.
Can the consumer lender keep it up?
Position: none
Is credit card lender Capital One (COF:NYSE) single-handedly holding the economy up?
It would seem so from the rip-roaring loan growth the company has been posting for the last two months. The McLean, Va., lender added $2.8 billion of loans to its portfolio in August and $1.7 billion in July, according to numbers released Tuesday after the close of regular trading. That's quite an achievement, seeing as Federal Reserve data show that consumer revolving loans -- which are nearly all credit card loans -- have been stagnant this summer. Indeed, revolving loans slid to $721.1 billion in July, down from $723.4 billion in May. August numbers aren't out yet.
Capital One is growing its loan book at the sort of rate that wows investors, but it will no doubt rile regulators if it continues. The $2.8 billion increase in August at the company works out to 4.5% growth on the prior month, or 54% annualized. The September jump was 2.7% on the month and 33% annualized. These eye-popping numbers come on the heels of several months of relative sluggishness at the company. Last year, Capital One had to slam the brakes on lending to people with bad credit, or subprime borrowers, after delinquent loans started climbing, causing the stock to slide. Capital One said it was going to shift its emphasis to borrowers with much better credit, but the profit margin in this "superprime" business is low.
A big jump in superprime and auto loans was likely responsible for the sizzling portfolio growth at Capital One in July and August. Capital One has just released a card with a "fixed rate" of 4.99% as a way of targeting the superprime and prime customer. Of course, the rate is fixed only as long as Capital One wants to continue the product, and it may make a quick exit if it isn't profitable or if it finds its many competitors -- most of which have much sounder balance sheets, deeper pockets and better relationships with their regulators -- offer something more attractive to the market.
The company didn't return a call seeking comment.
On tough day for financials, Capital One stock leaped $2.86, or 5.1%, to $58.91. The stock has climbed even as Nigel Morris, Capital One's former chief operating officer, has been dumping millions of dollars' worth of stock this summer. He left the COO post in April but was scheduled to remain in another senior position till the end of this year.
Capital One's former CFO, David Willey, left in March amid a Securities and Exchange Commission investigation into whether Willey had sold Capital One stock while benefiting from insider information.
The reason for the sizable move up in Capital One stock Wednesday is that the monthly disclosure also showed an apparent improvement in bad loan numbers. Losses due to unrecoverable loans fell to 5.34% of the portfolio in August, from 5.75% in July. Loans more than 30 days delinquent also dipped, to 4.74% from 4.92%.
However, the torrid growth is the main reason for the improvement in those ratios. The losses and delinquencies are measured as a percentage of loan totals. Thus, in high-growth periods loss ratios appear more favorable because the new loans that are added to the calculation haven't had time to go bad. If we measure the August losses as a percentage of average loans three months previously, it is 5.66%, not such a good result. And if we do the same for past-due loans, using total period-end loans, we get a delinquency rate of 5.1%, which is way up on the August ratio, and the ratio for three months earlier. In other words, loans are still going bad at a nasty clip, and the growth is masking it.
That doesn't mean Capital One won't see further improvement in credit quality. If it is indeed focusing on superprime customers, lower bad loans would be expected. However, credit was never the main problem with Capital One, especially once it had made its emergency retreat from the subprime sector. No, overuse of penalty fees was considered the bigger issue. Capital One skeptics thought the biggest challenge facing the company in 2003 came from new regulations designed to prevent credit card lenders from hitting borrowers with too many penalty fees.
Despite requests by this column, Capital One hasn't provided adequate disclosure of its late and over-limit fees, suggesting that it remains heavily reliant on them. Capital One's numbers have yet to show evidence of a big dent in fees, but that could be because it has yet to implement them in a meaningful fashion. Alternatively, one persistent rumor is that its main bank regulator, the Federal Reserve, is, for the time being at least, taking a softer stance in applying the penalty fee rules than the Office of the Comptroller of the Currency, which regulates the banks used by some other credit card companies.
But with Capital One back growing like there is no tomorrow, the company's regulators have one more reason to be worried. Yep, Capital One is far from being a no-hassle card company. |
