Capital One Financial 2Q profit drops 40 percent
NEW YORK—Capital One Financial Corp. said Thursday its second-quarter earnings fell 40 percent due to a sharp increase in its loan-loss provision amid further deterioration in the credit markets.
The financial services firm's net income fell to $452.9 million, or $1.21 per share, from $750.4 million, or $1.89 per share, a year earlier.
Analysts polled by Thomson Financial, on average, had forecast higher earnings of $1.31 per share for the quarter.
Total revenue fell nearly 5 percent to $3.35 billion, from $3.51 billion during the year-ago period.
Capital One's profit fell as it was forced to set aside more cash to cover more loan defaults. The company, which has a large presence in the credit card lending business, has faced rising defaults over the past year like nearly all other banks and lenders.
Red Gillen, a senior analyst with Celent, a Boston-based financial research and consulting firm, called the results a "confirmation that things are really bad out there."
Gary Perlin, Capital One's chief financial officer, said during a conference call that the company is assuming that credit pressure will rise in coming quarters.
Capital One set aside $829.1 million during the second quarter to cover bad loans, more than double its year-ago $396.7 million reserve. The loss provision did actually decline from the fiscal first quarter, when Capital One allocated $1.08 billion for loan losses.
In its national lending segment, which primarily consists of its U.S. credit card business and auto financing division, Capital One's charge-off rate rose to 5.67 percent in the second quarter from 3.47 percent during the year-ago period.
The charge-off rate measures the amount of loans written off as not being repaid compared with a company's total loan portfolio.
Within its U.S. cards division, the charge-off rate rose to 6.26 percent from 3.56 percent during the second quarter in 2007. Capital One said it anticipates the rate will be in the low 6 percent range in the third quarter but rise to about 7 percent in the fourth quarter.
Richard Fairbank, Capital One's chief executive, said on the conference call that the charge-off rate would likely be effected by several factors including regular seasonal patterns, continued weakening in the U.S. economy and the initial impact of new minimum payment requirements.
Celent's Gillen characterized Capital One's expected loss ratios as "reasonable" and said any recovery would not likely begin until there is improvement in the housing market.
With consumers less able to tap home equity for cash, they will turn to their credit cards and that will likely continue to pressure charge-offs, Gillen said.
Capital One's U.S. card division's net income fell 43 percent to $340.4 million, despite a 5 percent rise in revenue to $280.7 million.
In the auto finance division, profit slipped to $33.6 million from $38 million during the year-ago period, and its charge-off rate rose to 3.84 percent from 2.35 percent.
Profit in the company's local banking unit fell 57 percent to $67.1 million, primarily due to an increase in loss provisions.
Shares of Capital One fell $2.20, or 5.1 percent, to $40.60 in after-hours trading. The company's shares rose sharply during regular trading, gaining $5.52, or 14.8 percent, to close Thursday at $42.80.
