![]() ![]() In my view, Capital One is likely to face a significant decline in earnings this year back to pre-COVID levels. Further, banks are finally being forced to raise deposit and CD rates to maintain deposits, implying net interest margins are likely to plummet this year. Still, consumer sentiment, savings, and household financial health data indicate default rates may only be starting to rise. Default rates are not yet high enough that the bank will likely suffer significant losses. This data indicates Capital One and its peers will face challenging headwinds in 2023. While many investors seem to discount this risk factor, consumer sentiment surveys and savings levels paint a challenging picture of personal lending stability. ![]() However, the rapid decline in consumer sentiment and savings over the past year has caused default rates and expected loan losses to increase. Initially, this situation was great for Capital One as demand for its products rose, and its net interest margins increased on higher APR rates. Rising living costs and stagnating wages caused savings to decline, creating excess demand for credit card debt. However, "there is no free lunch" as the massive inflation caused by the stimulus quickly caused the household economic situation to sour by 2021. Consumer credit-oriented banks such as Capital One ( NYSE: COF ) soared in value, with that bank rising to ~70% above its pre-COVID level by 2021. During that time, real hourly earnings rose (due to stimulus payments and extra unemployment benefits), and credit default rates plummeted. Surprisingly, 2020 was an outstanding year for the consumer credit market due to immense government stimulus and a "forced decline" in extraneous spending levels (vacations, etc.). The initial "shock" appears to be the rise in inflation, which is now partially moderated, but the increase in interest rates seems to be causing default rates to rise. Over the same period, real wages have declined, and personal savings levels have plummeted. Since March of 2021, the total US consumer credit outstanding has increased by 13%, while revolving consumer debt has grown by 31%. Over the past two years, rising living costs have caused many people to become more reliant on debt financing.
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