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Lower Defaults for Discover and AmEx

Zacks Equity Research

On Wednesday, card companies including Discover Financial Services (DFS) and American Express Company (AXP) reported their charge-off and delinquency rates for the month of January 2012.

AmEx reported a decline in its charge-off rate to 2.2% of balances on an annualized basis in January 2012 from 2.3% in December 2011 and 3.8% of balances in January 2011. The company has the lower charge-off rate in the card industry, primarily due to its prosperous clientele.

Discover also reported a decline in charge-offs to $39.7 million or 2.75% of balances on an annualized basis from 3.15% in December 2011 and 5.75% in January 2011. Besides, the company recorded a delinquency rate of 2.31% of balances, reflecting a downside of 1 basis point (bps) sequentially and 153 bps year over year.

Meanwhile, AmEx witnessed a 1.4% delinquency rate, at par with the prior month and down 70 bps from January 2011.

Discover’s delinquency rate reached the highest point of 5.72% in October 2009, while the highest charge-off rate of 9.11% was experienced in February 2010. AmEx’s record of highest charge-off exceeded Discover’s record at 10.4% in April 2009, although its highest delinquency was marginally better than Discover’s at 5.3% in February 2009.

Delinquency rate is the percentage of payments delayed by 30 days or more. It is normally an indicator of future charge-offs. Card companies usually write-off loans when they are in default for six months from the due date.

The declining delinquency of Discover bodes well for the company’s future as the defaults in the upcoming months are likely to be lower. Moreover, the constantly declining defaults in both companies indicate that the financial position of their consumers is improving, thereby enabling them to pay off their liabilities.

Additionally, both the companies have tightened their lending standards and are controlling their problem accounts more stringently. Thus, we expect the decline in both delinquency and charge-off rates to continue in the near future.

Currently, AmEx carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, Discover carries a Zacks #1 Rank, implying a ‘Strong Buy’ rating for the near term.

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