As a one man shop, I can’t cover every single copy or read every report. So what I try to do is look at bellwethers, company’s that cover a broad swath of an industry and that should give insight into the whole.
Capital One (COF) fits that bill for the credit card industry. They have 35.3 million US credit cards outstanding. Each credit card holder charged an average of $612 on their card in the first quarter and has an average outstanding balance of $1898. That equates to $21.6 billion charged on Capital One credit cards in the first quarter and $67.0 billion in outstanding balances.
The portfolio is showing serious deterioration. Credit companies charge off balances when they conclude they won’t be able to collect on them. The annualized net charge off rate a year ago was 5.85%. It has increased since as follows: 6.26% (2Q ’08), 6.13% (3Q ’08), 7.08% (4Q ’08), 8.39% (1Q ’09). According to The Wall Street Journal, the CEO said on yesterday’s conference call that US credit card charge off rates would “cross 10% in the next couple of months”.
A quick look at Capital One’s balance sheet shows $150.6 billion in liabilties and about that much in liquid assets. Almost all of their $26.7 billion in book value are intangibles like goodwill or illiquid assets like plant, property & equipment. There just doesn’t seem to be too much room for Capital One to absorb these kinds of losses.
Disclosure: Top Gun has no position in Capital One (COF) shares.