Capital One Financial saw its stock price pounded Friday following the card issuer's projection that its credit losses will rise substantially next year.
At first glance, the McLean, Va., firm's earnings report carried good news about the ability of its cardholders to pay off their debts. The net chargeoff rate in Capital One's U.S. credit card business fell by 23% in the third quarter from the same period a year earlier.
But Chief Executive Officer Richard Fairbank said that the current rate is "unsustainable" and told analysts that throughout 2015 he expects the chargeoff rate to be back in the same range where it was a year ago. The firm also announced a 17% boost in its provision for credit losses, and said that it expects to continue building that buffer in coming quarters.
Investors sold off Capital One shares on Friday, driving the stock price down 2.7% on a day that market-wide indices were rebounding.
Christopher Donat, an analyst at Sandler O'Neill, said that stock traders appeared to be selling in response to Capital One's projections that its credit quality will worsen.
Capital One's credit-card portfolio includes a larger percentage of subprime borrowers than many of its competitors. Donat speculated that the inability of some customers with low credit scores to pay their bills may be one reason Capital One is expecting its credit losses to rise.
"It appears to be a Capital One-specific issue," he said.
Most other top credit-card issuers have sounded upbeat about their credit quality during conference calls with analysts this week.
Citigroup Chief Financial Officer John Gerspach suggested that credit performance in the New York bank's card businesses may have room for improvement in the coming quarters. JPMorgan Chase CFO Marianne Lake told analysts that the credit environment remains benign.
Bank of America CFO Bruce Thompson said that the credit quality of its U.S. card business continued to improve in the third quarter. Brian Doubles, CFO of Synchrony Financial, the private-label card issuer that's being spun off from General Electric, described asset quality as stable.
American Express CFO Jeffrey Campbell said that he expects the firm's chargeoff rates to eventually rise somewhat from today's low levels, but he did not provide a timetable for when that will happen.
Capital One CEO Fairbank said that his company's projections are not reflective of industry-wide trends. "This isn't really about the credit card industry; it's really about Capital One," he told analysts during the company's third quarter conference call.
But Fairbank cast the projected increase in chargeoffs in a positive light, saying that it's partially the result of growth in Capital One's credit card loan portfolio. In the credit card business, average loans held for investment were up 2% in the third quarter from the same period a year earlier.
He said that loan growth brings "increasing losses, particularly compared with our environment of not much growth, and even shrinking over the last few years."
Fairbank also explained that unusually low losses in the third quarter contributed to his expectation that loss rates will increase significantly next year.
"We aren't counting on further economic improvement helping our credit loss, nor are we projecting renewed economic weakness," Fairbank said. "Of course, changing in this still tenuous economic recovery could substantially impact our current loss expectations."