Amid the current turbulence of the US economy,
both American Express and Capital One have posted disappointing
second quarter results – perhaps an indication that the two
companies have until now underestimated the size of the US
financial crisis and its continued stranglehold on consumer
Capital One
Despite a 5 percent rise in overall revenue,
the US card division of Capital One reported net income of $340.4
million – a 43 percent drop from its second quarter 2007 figure and
a 30.7 percent decrease relative to the first quarter of
Charge-off rates increased in the second
quarter of 2008 to 6.26 percent from 5.85 percent. One year ago,
this figure stood at 3.56 percent. The company expects the
charge-off rate to remain in the low six percent range in the third
quarter, rising to around 7 percent towards the end of the
“Capital One’s prediction is based on the fact
that the US economy will continue to slow down or worsen for the
remainder of this year, as the mortgage crisis continues to impact
corporate performance and the job market,” said Red Gillen, a
senior analyst with financial consultancy Celent. “As more people
suffer from employment cutbacks, they will increasingly default on
other credit facilities, such as home equity loans and credit
Overall, Capital One has reported a 40 percent
drop in profits in the second quarter of 2008, largely due to a
continued deterioration of the credit market. The company has set
aside $829.1 million during the second quarter to cover bad loans,
more than doubling the $396.7 million figure from the same time
last year. Nevertheless, this figure is actually down from the
first quarter of 2008, when the amount set aside for loan losses
topped the $1 billion mark.
According to the company, the second quarter
results for its cards business are an indication of the “continued
cyclical credit worsening and the company’s actions to navigate the
downturn”. While Capital One remains “cautious” on loan growth, it
believes it remains “well positioned to successfully navigate
near-term challenges and to deliver solid results through the
economic cycle.”
Overseas, Capital One also struggled with a
challenging economic environment in the UK, as increased provision
expenses ate into profits. However, the company’s Canadian cards
business continued to perform well, with a steady credit
performance and solid returns, somewhat offsetting the downwards
trend in the UK.

American Express

Despite its reputation for a wealthy customer
base, Amex announced a disappointing 38 percent decline in profits
for the second quarter of 2008, the third straight quarterly drop
it has posted. According to Amex, this was due to the overall
slowdown in consumer spending, as well as the level of charge-offs
increasing beyond the company’s expectations.
“Cardmembers across our portfolio are being
impacted by the weakening economy, from our longer term, superprime
cardmembers to newer cardmembers,” Joanna Lambert, vice-president
of corporate communications at Amex, told CI.
“We are seeing even our most affluent
cardmembers changing their spending behaviours, including cutting
back on discretionary spend.”
Notably, this quarter’s results included a $70
million payment from Visa relating to the long running anti-trust
dispute. The $150 million quarterly payment from MasterCard is
scheduled to begin later this year, and in all likelihood will be
used to help Amex build up its loan loss reserves.
The company’s US card services division
reported a profit of just $21 million, a staggering drop from $580
million a year ago. In order to meet the expected losses, American
Express has set aside nearly $2 billion during the quarter, double
the $977 million it set aside the same time last year.
“The recently announced poor results stem from
historical issuance of credit, often to relatively high-income
individuals,” explains Gillen. “Given that such consumers were
often provided with relatively high lines of credit, their
defaulted loans were, not surprisingly, relatively high.”
In light of this, Amex is now reducing some of
its credit lines and making a concerted effort to focus more on its
more profitable niche sectors as opposed to actively pursuing more
domestic clients. Revenue from its international card services
division grew to $1.3 billion, due to higher cardmember spending
and borrowing – a 20 percent increase from the previous year. The
total figures for cards abroad topped 90 million, up from 82.2
million one year ago.