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Consumer bureau, working in conjunction with OCC, orders Capital One to pay $210 million for deceptive credit-card marketing practices.
July 18
Capital One's (COF) second-quarter earnings may have been noisier than a Rolling Stones concert, but after stripping out all those one-time expenses analysts say there was much to like in the results.
The McLean, Va., company reported roughly a dozen one-time accounting items in its earnings, including several large items related to its May
Its earnings were also affected by a
"This was in many ways what's I'd characterize as a kitchen-sink quarter," says Mike Taiano, a director with Telsey Advisory Group, a research and brokerage firm in New York.
"I think people were waiting to get past the first half of the year, because everyone knew it was going to be extremely noisy. I think now people feel a little better knowing what to expect on the purchase accounting adjustments," he adds.
In all, Capital One's profits plunged 90%, to $92 million, even as revenue grew 27%, to $5.06 billion.
The largest of the one-time accounting items was a $1.7 billion provision for credit losses, including a $1.2 billion allowance for the non-impaired assets purchased from HSBC, the company said. Capital One (COF) also agreed to pay a total of $210 million in penalties and restitution in the CFPB marketing action, and recorded $101 million in expenses in the quarter for that.
It also recorded a $180 million expense related to soured mortgage loans and set aside $98 million in its litigation reserve for the interchange lawsuit and other claims.
Ignoring out all the one-time items, however, analysts — and investors — were pleased with the results. Capital One's shares were trading at $57.51 midday Thursday, up nearly 5% and hovering near a 52-week high.
"If you look at the revenue margins in both the legacy card business and the HSBC portfolio, they were very strong, and growth in other segments looked pretty good," says Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods.
Auto loans grew 7%, to $25.3 billion, and commercial loans grew 3% to $36.1 billion. Domestic card loans — Capital One's main line of business — grew 52% to $80.1 billion, primarily due to the HSBC acquisition. Excluding the HSBC deal, domestic credit card purchase volumes grew 11%, as the company continued to market to heavy spenders.
In a conference call with analysts Thursday, Chairman and Chief Executive Richard Fairbank said that the company's consumer banking business gained traction with its purchase of the Internet bank ING Direct and that is commercial banking arm "continues to deliver strong and steady overall performance."
Fairbank also gave a bit more perspective on Wednesday's enforcement action from the CFPB — the first-ever issued by the year-old agency. At issue is how third-party vendors marketed a variety of products — such as payment protection plans — to credit-card users who had low credit scores or low credit limits.
During the call, Fairbank vowed to fix the problems.
"We are accountable for our vendors' sales of products to our customers, and we take that obligation very seriously," he said. "In this case, we did not monitor our vendors' performance closely enough. We deeply regret any process breakdown that impacts our customers. When it happens, we fix it and make it right."
Fairbank reiterated earlier statements that the company has no current plans to resume sales of the products, which also include credit monitoring services such as identity protection.
"We have no intention to sell these card add-on products in the future because the economics of our credit card business does not depend on revenues from add-on products," he said.
Executives on the call estimated that the impact of the refund is roughly 10 basis points, though they acknowledged the company could take a bigger hit going forward.
"There are two revenue impacts," Fairbank said. "One is the lost revenue from the customers we're remediating. That's the round number of 10 basis points on the domestic card revenue margin. And then we will forgo revenues related to future sales of payment protection and credit monitoring because we've chosen to stop selling the products. The revenue impact of this choice is harder to predict because, as we've learned over the last few years, credit margins are really driven by competitive dynamics in the marketplace once you get there."
Still, analysts say that while the financial impact is likely manageable, the bigger challenge could be regaining consumers' trust.
"They were apologetic, as you'd expect them to be," says Taiano. "The biggest concern from an investor standpoint is not so much near-term financial impact but the reputational risk."
