Credit Line Increases Fuel Growth at Capital One

After two years of slimming down, Capital One Financial (COF) is finally seeing growth in its U.S. credit card loan portfolio.

The $290 billion-asset company reported a modest 1% year-over-year increase in domestic card loans at the end of the second quarter, which was 3-6 months earlier than Capital One had projected.

One key factor in the revival of loan growth was Capital One's decision to start increasing credit lines for more of its existing card holders, according to Chief Executive Richard Fairbank.

Like other credit card companies, McLean, Va.-based Capital One was forced to alter its approach to line increases after the enactment of the 2010 Credit Card Accountability Responsibility and Disclosure Act. That law, known as the CARD Act, requires card issuers to consider borrowers' income before raising their credit lines.

By the end of 2012, credit line increases across the industry were only 35% as frequent as they were in mid-2008, according to a report last year by the Consumer Financial Protection Bureau. Those figures include both line increases that were requested by customers and those that were proactively put in place by card issuers.

Capital One's line-increase program went through what Fairbank described as "a bit of a brownout" as it was retooled to comply with the new regulations.

"We kind of got to a good place in the latter part of last year," Fairbank explained during a conference call with analysts Thursday. "So we started initiating credit line increases on a growing basis around that time."

Fairbank said that Capital One customers who start with relatively low credit lines will tend to see the biggest increases. But customers in all segments of Capital One's portfolio are now more likely to see their available credit rise.

Brian Riley, a credit card industry analyst at CEB TowerGroup, says that line increases offer a way for card issuers to build their loan volume without adding new customers.

"Everybody's dealing with the same issues, which is essentially that the card portfolios are flat," Riley says. "Managing your existing customer base is a nice, easy strategy to add some lift to volume."

Riley says that card issuers would be prudent to avoid making large jumps in their customers' credit lines. Between mid-2008 and the end of 2012, credit line increases for consumer cards generated a 4.8% increase in total credit lines, according to the CFPB report.

Loan growth has long been a goal at Capital One, but it's has been held back by certain strategic choices, including the company's decision to let certain parts of its loan portfolio run off. Other constraints include the sluggish economic recovery and fierce competition with rival issuers for affluent customers.

The last time Capital One reported loan growth in its domestic card portfolio was the second quarter of 2012, when the firm absorbed a $27.6 billion credit card portfolio acquired from HSBC.