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LOS ANGELES (AP) — Capital One Financial Corp. is expected to report on Thursday a steep decline in net income for the second quarter, as the company created a reserve to cover possible losses from accounts acquired when it bought HSBC's U.S. card business.
WHAT TO WATCH FOR: Whether consumers' used Capital One credit cards more or less, as well as details on how quickly borrowers are paying down their balances — trends that factor into how much interest and fee income the company earns.
A healthier-looking job market and warmer weather encouraged more Americans to shop in the first quarter. Capital One saw loans at its domestic card business grow about 5 percent from a year earlier, while purchase volumes rose about 15 percent.
But consumers pulled back in the second quarter, as the pace of job growth slowed, bringing concerns about another economic slowdown. Americans spent less at retail businesses each month between April and June. Retail sales hadn't dropped for three straight months since the fall of 2008, at the height of the financial crisis.
A decline in retail spending typically translates into lower credit card use, which hurts card issuers like Capital One.
Sales trends aside, Capital One's second-quarter earnings are expected to be weighed down by an accounting adjustment related to its $2.6 billion purchase of HSBC's U.S. card business.
The deal closed May 1, and Capital One took possession of $28.6 billion in HSBC card assets. Accounting rules require Capital One to set aside reserves to cover uncollected balances, chewing up a good portion of its earnings for the quarter.
Investors also will be interested in learning how the company's integration of ING Direct is coming along.
Capital One completed its $8.96 billion acquisition of Netherlands-based ING Groep's U.S. online division in February. Capital One aims to pitch credit cards and other financial products to ING Direct's 7.5 million customers.
WHY IT MATTERS: Capital One, based in McLean, Va., is best known for its credit card business, but it has taken steps to increase its profile as a national bank in recent years. The acquisition of ING Direct made Capital One the nation's sixth-biggest bank, based on deposits.
WHAT'S EXPECTED: Analysts, on average, forecast earnings of 57 cents per share on revenue of $5.1 billion, according to FactSet.
LAST YEAR'S QUARTER: Capital One reported second-quarter 2011 net income of $911 million, or $1.97 per share, on revenue of $4 billion.