mixed fortunes for the US’s largest card issuers, with Capital One
suffering more than most. The company surprised investment analysts
and shareholders with a large decline in earnings, mainly from the
fallout of the slump in the US sub-prime mortgage industry, which
followed Capital One’s acquisition of the GreenPoint mortgage
business, as part of the North Fork acquisition in late 2006.
Capital One’s earnings for the first quarter were $675.1
million, compared to $883.3 million in the year-ago period. Capital
One recorded a net loss in its Mortgage Banking sub-segment of
$12.6 million. The business originated $6.8 billion in loans during
the quarter, down $1 billion from first quarter of 2006
originations and down $2.5 billion in originations in the last
quarter of 2006. The North Fork and GreenPoint acquisition formed a
key part of Capital One’s strategy of diversification away from its
monoline card issuing model. Capital One, the fourth-largest Visa
and MasterCard issuer in the US, paid $13.2 billion for North Fork,
a US regional bank, and earlier in 2005 Capital One acquired
Hibernia for $5 billion.
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However, Capital One also suffered higher card losses and loan
losses, with net charge-offs rising by 37 percent. Profits for
Capital One’s newly structured National Lending segment (comprising
the US Card, Auto Finance, Global Financial Services and Mortgage
Banking divisions) fell by 23 percent. US Card net income for the
first quarter was $495.3 million, down from the record $602.8
million in the first quarter of 2006, but up from $337.2 million in
the fourth quarter of 2006, reflecting expected seasonal patterns,
according to Capital One.
The managed charge-off rate increased to 3.99 percent in the
first quarter of 2007 from 2.93 percent in the first quarter of
2006 and from 3.82 percent in the previous quarter due to expected
seasonality and normalisation of credit. Managed loans as of the
end of March 2007 were $49.7 billion, up $2.5 billion, or 5.4
percent, from the year-ago period, but down $3.9 billion, or 7.4
percent from the prior quarter.
The Global Financial Services (GFS) sub-segment’s net income was
$74.8 million, down $38.7 million, or 34 percent, from $113.5
million from the first quarter of 2006. Net income in the fourth
quarter of 2006 was $2.1 million. The managed charge-off rate
increased to 4.18 percent in the first quarter of 2007 from 3.63
percent in the first quarter of 2006, which the company said was
largely due to credit normalisation in the US and continuing credit
challenges in the UK.
However, Capital One’s diversification may yet prove profitable.
Gary Perlin, Capital One’s CFO, said: “Our expectations for
consumer credit to return to more normal levels and the yield curve
to remain flat are unchanged. The company’s core operations remain
strong, and infrastructure upgrades completed in the quarter will
provide opportunities to generate efficiencies and cost savings
benefits in the future.”
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By GlobalDataMoshe Orenbuch, an analyst at Credit Suisse First Boston,
commented: “The company will need to begin realising the cost
savings from the North Fork acquisition as well as a more
aggressive cost containment programme in its businesses overall, as
well as a more targeted capital management programme as we move
into 2008.”
Meanwhile, Joe Dickerson of Atlantic Equities said: “We expect
higher than normal volatility in Capital One’s results in 2007
given mortgage market pressures and transition phase from consumer
finance company to bank. While the firm faces elevated exogenous
risks in the mortgage market, which will exacerbate near-term
results, it continues to be an advantaged credit risk manager.”
