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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.

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.

 

 

Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

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6 Comments

  • Jackson Henderson August 29, 2020

    This is why the bigger the better when it comes to banks, and the ridiculous criticism of the repeal of Glass-Steagall doesn’t hold water. The big banks do consumer banking (mortgages, deposits, credit cards, personal loans, etc), investment banking (equity/debt issuance, advising), corporate banking, wealth management, and global markets (forex, trading for clients). If these banks hurt on the consumer side, global markets or wealth management make up for it. In Q2 consumer banking was a rough spot for citi because of loan loss reserves but the trading revenue was record high and citi was profitable. Banks like cap one are always going to feel more pressure during a crisis.

    COVID is unique in that the economy was handsomely supported by the fed and treasury with some businesses getting stimulus money, households getting stimulus checks and expanded unemployment benefits, and small businesses getting PPP. It is counterintuitive but charge offs declined for citi in July compared to May and June because more people are paying down their balances and hopefully using the extra money wisely for their financial future.

  • AlohaDaveKennedy August 29, 2020

    So far no cut in my Capital One Spark credit limit (or other bank credit limits for that matter). Been using the Spark card (earning 2% cash back) since March in place of miles earning cards since all travel plans are scrapped for 2020 (and possibly 2021).

  • Susan August 29, 2020

    I’ve not experienced rates lowering on any of my credit cards, but planned to take advantage of the lower mortgage rates to refinance and pull cash out. Wells Fargo is my main bank and I have my home mortgage through them – they have stopped all cash outs thru the end of the year. Refi only. Going thru Prospect Financial and they are really scrutinizing everything so may have to look elsewhere, but it really is jumping through hoops just to pull the equity out of my own property.

    • Jake from MSP August 29, 2020

      @ Susan, your first mistake is trusting WF

  • Ford Prefect August 29, 2020

    I’ve played the game since 2012 and have never been approved for a card with C1 at any point. Always instant denial. Credit score 800+, never a late payment. Have business and personal accounts (and have had many) cards with all the major banks.

    Non-citizen wife with no job or credit history got approved for a card with them.

    No tears from me for a group that deliberately excludes “overqualified” applicants and targets the most vulnerable(profitable).

  • Ghostrider5408 August 29, 2020

    This is just the beginning all one has to do is look at the ’08/09/10 financial crisis and what the cc companies did then, the difference this time is when we come out of the other side they might not be handing out those huge credit limits as they once did. I have a couple of high limit cards and frankly just waiting for mine to get chopped.

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