Capital One loses another Billion and slashes credit card limits

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For some reason Cap1 has captivated my interest more than other financial institutions throughout this economic crisis.  Part of my interest hinges on my desire to anticipate how banks will mitigate risk, and perhaps that would better inform me on how to navigate the credit card ecosystem, and since Capital One arguably has the most exposure to lower and middle class default risk, I think I’ve monitored it more closely.  I’m not convinced it’s a bellwether for the industry, but the inertia of my interest has rendered me more sensitive to Capital One headlines.  That’s not to say other banks haven’t piqued my interest, especially when headlines announce shored up  loan loss reserves to almost unparalleled levels, but Capital One seems to me to be the most prone to outsized risk. What I’m beginning to think is that banks may have absolutely no idea how much loss they may incur…

This quote from Cap1 CEO Richard Fairbank bolsters that hunch,

“I don’t think we have a rigorous measure of how many of our current borrowers are unemployed.” 

If you don’t know how many people are unemployed/underemployed, then how do you know who is credit worthy and who isn’t? While it isn’t exactly the same, it reminds me the 2008/9 banking crisis when credit agencies were selling mortgage backed securities that didn’t disclose true default risk of the mortgages that were packaged – if you can’t discern the default risk of a tranch, then you can’t properly assess the risk.

DOC reported over a week ago that Capital One was making credit limit reductions across the board.  Credit limits have been slashed to either $5k or $1500/$2k. Call it Draconian or existentially necessary, but it isn’t a good sign for times to come.

Cap1 lost a Billion dollars for the second straight quarter. People are saving a lot more than they used to, and this means that interest income has plummeted – a large driver of Cap1 revenue. Uncertainty surrounding CARES $600 a week payouts adds additional stress to bank’s balance sheets. Compound these stresses with forebearance and whether outstanding loans will be paid back in full and Capital One has made the decision to cut people’s access to credit.

While I understand the strategy of minimizing risk, I wonder how many Cap1 cardholders are going to have negative hits to their credit score. Cap1 appeals to less credit worthy clientele, those with distressed or lower credit scores, and I would assume more vulnerable scores. A hit to their credit limit will undoubtedly increase their credit utilization score, and consequently lower their credit scores. A spike in utilization could trigger other banks to examine how those clients are using their credit. If you’re reading this, and this applies to you, keep an eye on it.

Capital one lowered my credit line amidst the hurricane and covid. Capital one was my safety net, it took me over a decade to get the credit limits up and PAID OFF. To establish a life line. So disappointing! Perfect payment history and loyalty down the drain “business decision”

— James Russell lll (@JRthelll) August 28, 2020

I’m going to dangle this fruit out there too…Fed Funds rate is super low, like zero. The Fed is also buying toxic corporate debt – arguably companies whose management ran them into the ground getting a reprieve and another chance at the debt markets. All of this generates liquidity for the system, but it also provides financial institutions and corporations opportunities to fund ongoing operations at extremely low rates. Have you seen banks lower interest rates on credit cards?

It wasn’t long ago that Cap1 offered some of the best credit card offers we have ever seen: remember the Cap1 Spark Miles 200k offer? You had to spend $50k in 6 months. That isn’t very easy if your limit is $5k.