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Capital One Profit Plummets on One-Time Reserve Build

July 18, 2012

Capital One Profit Plummets on One-Time Reserve Build, Refunds

Capital One Financial Corp. fell 1.7 percent to $54.89 in New York trading. Photographer: Paul Taggart/Bloomberg

Capital One Financial Corp. (COF:US), the lender that gets more than half of revenue (COF:US) from credit cards, said second-quarter profit fell 90 percent as an acquisition forced it to set aside loan-loss reserves.

Net income fell to $92 million, or 16 cents a share, from $911 million, or $1.97, a year earlier, the McLean, Virginia- based company said today in a statement. Income from continuing operations was 33 cents a share. The average adjusted profit estimate (COF:US) of 20 analysts surveyed by Bloomberg was $1.46.

Chief Executive Officer Richard Fairbank, 61, has spent more than $28 billion on acquisitions since 2005 to expand beyond the credit-card business. The deals, including the 2012 purchase of ING Direct USA and HSBC Holdings Plc’s U.S. card business, made Capital One the sixth-biggest U.S. commercial bank by deposits. The company set aside the reserves to cover losses on the acquired HSBC loans.

“While second-quarter results reflect significant purchase accounting impacts and other items, the strong underlying performance of our businesses continues to demonstrate that we’re well positioned to deliver sustained shareholder value,” Fairbank said in the statement. “We’re focused on delivering that value, including distributing capital to shareholders through a meaningful dividend and opportunistic share buybacks.”

Capital One fell 1.7 percent to $54.89 in New York trading. The shares have advanced 30 percent this year, compared with the 17 percent gain for the 24-company KBW Bank Index. (BKX)

Expense Allowance

“We will build an allowance for these non-impaired loans in Q2 and this will go through the provision expense line,” Capital One Chief Financial Officer Gary Perlin said at an investor conference June 13. “This expense should consume most or all of one quarter’s normal income.”

Capital One’s provision for credit losses was $1.7 billion, including $1.2 billion for the HSBC loans. The company released $259 million in reserves based on “strong” credit performance in its legacy businesses, according to the statement.

Revenue at Capital One, which primarily lends to U.S. consumers through its credit-card unit and an auto-loan business, is threatened by new regulatory regimes intended to protect shoppers. The company also has a commercial-banking business, and offers home loans.

The lender said second-quarter revenue climbed to $5.06 billion, a 27 percent increase from a year earlier.

Marketing Settlement

Capital One said earlier today it had agreed to pay a total of $210 million to settle charges that third-party vendors engaged in deceptive marketing of credit card “add-on” products such as payment protection and credit monitoring. The newly created Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency said the lender agreed to refund between $140 million and $150 million to 2 million customers and pay an additional $60 million in penalties -- $25 million to the CFPB and $35 million to the OCC.

Capital One set aside $41 million in reserves to cover the costs on top of the $75 million it marked last quarter. The lender said it won’t recognize revenue for the products, $24 million of which was billed in the second quarter, according to the statement.

Capital One said in a statement that it became aware of its vendors’ practices in late 2011.

“We are accountable for the actions that vendors take on our behalf,” Ryan Schneider, president of the card business, said in the statement. “These marketing calls were inconsistent with the explicit instructions we provided to agents for how these products should be sold. We apologize to those customers who were impacted and we are committed to making it right.”

Swipe Fees

The lender faces other threats. Capital One joined firms including Visa Inc. and MasterCard Inc. in a settlement last week of a seven-year price-fixing case brought by retailers over credit-card swipe fees. The agreement provides for a temporary reduction in interchange rates, which banks collect, and allows merchants to impose surcharges on customer purchases, which may push them into lower-cost options.

The surcharge rules and interchange could cut annual earnings-per-share at Capital One by about 8 percent, Morgan Stanley analysts led by Glenn Fodor wrote in a July 12 note.

Capital One took $27.6 billion in HSBC credit-card loans onto its balance sheet in the quarter, and didn’t show any other growth in its U.S. card business compared with the first quarter. Auto loans climbed 7 percent over the first quarter, while loans in the commercial-banking segment rose 3 percent. Total deposits fell $2.6 billion from the first quarter.

Net interest margin, the difference between what the company makes on loans and securities and what it pays for funds, declined 0.16 percentage points to 6.04 percent.

Retail sales in the U.S. unexpectedly fell for a third month in June, prompting economists at Morgan Stanley, Goldman Sachs Group Inc. and Credit Suisse Group AG to lower their forecasts for economic growth in the second quarter. A cooling job market is sapping the household spending that makes up 70 percent of the economy, curbing sales at retailers such as Target Corp. and Macy’s Inc.

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.


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Companies Mentioned

  • COF
    (Capital One Financial Corp)
    • $75.15 USD
    • 0.63
    • 0.84%
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