What Is the Net Charge-Off Rate?

The net charge-off rate is the annualized ratio of net charge-offs (NCOs) to average loans outstanding. NCOs are a lender's gross charge-offs less recoveries of its 澳洲幸运5官方开奖结果体彩网:delinquent debt.

The net charge-off rate measures the proportion of debt owed to a company that is unlikely to be paid back to that company. This "bad debt" will then be 澳洲幸运5官方开奖结果体彩网:written off on its financial statements. NCO rates shed important information to investors and analysts about credit st💃andards of lenders and the quality of their 🌱loan portfolio, and may also provide signals about general economic conditions.

Understanding Net Charge-Off Rate

A net charge-off (NCO) is the dollar amount that measures the difference between gross charge-offs and any subsequent recoveries of 澳洲幸运5官方开奖结果体彩网:delinquent debt. Debt that is unlikely to be recovered is often written off and classified as gross charge-offs. If, at a later date, some money is recovered on the 🐓debt, the amount is subtracted from the gross charge-offs to compute the new ne🐬t charge-off rate.

The net charge-off rate is the percentage representing that amount of debt that a company believes it will never collect and is an indicator of a financial institution's loan portfolio performance. A high net charge-off rate, especially when compared to the previous period or to other banks, would suggest that the loan portfolio may be too risky:

• Net charge-off rate = (net charge-off / average outstanding loans) x 100

澳洲幸运5官方开奖结果体彩网:Non-performing loans may be charged off as bad debt and purged from the books, often on a monthly or quarterly basis. If and when part of the debt is repaid, the net charge-off can be calcula🐓ted by finding the difference between the gross charge-offs and the repaid debt. A negative value for net charge-offs indicates that recoveries are greater than charge-offs during a particular period.

The 澳洲幸运5🍌官方开奖结果体彩网:charge-off rate of a 🎀credit card company is based on statistics identifying what debt is likely to default. A credit card company, for example,🍨 may post a 10.31% net charge-off rate, meaning that, for the specified period, the company🃏 expects that 10.31% of its debt will never be recovered.

Example

For instance, if a bank's average loans outstanding is $1 million and the net charge-off is $75,000, then the net charge-off rate would be as follows:

• ($75,000 ÷ $1,000,000) x 100 = 7.5%

Let's look also at a real-world example: Capital One Financial Corp (COF). reported that its total net charge-off rate in 2017, as a percent of average loans outstanding, was 2.67%. This was an increase in the net charge-off rate compared to the 2.17% figure it posted in 2016, or an increase of 50 澳洲幸运5官方开奖结果体彩网:basis points (bps). Per accounting rules, the ♕bank applied the net charge-off amount to the loan loss provision.💟