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Card Issuers Start to See Credit Quality Diverge

Capital One is the standout performer of the first quarter.

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First-quarter results represent a divergence among credit card issuers. All credit card issuers are at different stages of growth in this credit cycle and displaying mixed performance. On the basis of card issuer performance this quarter,  Capital One Financial (COF) appears to be one step ahead of peers, while  Synchrony Financial (SYF) and  Alliance Data Systems (ADS) are still digesting recent elevated growth and  American Express (AXP) is trying to catch up. We think Capital One is really realizing and expanding on the benefits of its HSBC card acquisition six years ago. We believe the greatest rewards go to the companies first to push the accelerator early in a credit cycle, when competition is low, and the first to hit the brakes toward the end of the cycle, when competition is high. On this front, Capital One stands out.

For credit cards, the best leading indicator of credit performance is a company’s delinquency rate, as one quarter’s delinquencies are highly correlated to credit losses in the following quarter. While the market is focused on a potential turn in the cycle, Capital One’s card delinquencies actually fell from the first quarter of 2017, and American Express’ delinquency rate was flat. Alliance Data Systems’ delinquencies were up 50 basis points year over year, which comes on top of March 2017’s increase of 50 basis points. The company attributes much of the increase to hurricane activity. However, neither Capital One nor Synchrony saw a similar rise in delinquencies, and neither mentioned hurricanes affecting payment behavior during the quarter.

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Colin Plunkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.