The rebound of credit card lending is having nasty side effects for Capital One Financial Corp. and American Express Co., which are spending more to compete for the most credit-worthy customers.
Loans are up at both companies, which on Thursday reported fourth-quarter earnings. But so were expenses. As the economy remains uncertain and the pool of customers who want — or can afford — to regularly use credit cards remains relatively small, analysts are increasingly worried about card-lender spending.
Capital One surprised investors when it said fourth-quarter non-interest
"The onus is on [American Express] to reduce expenses or moderate the growth rate, at a minimum," says Keefe Bruyette & Woods analyst Sanjay Sakhrani.
He adds that American Express will no longer be able to rely on litigation-related payments from Visa Inc. and MasterCard Inc., which have offset expense growth in past quarters.
Marketing expenses rose 36% from a year earlier at Capital One, while falling 12% at American Express. But the New York credit card company's spending on rewards — which, like marketing, attract and retain customers — rose 10%.
During a Thursday night conference call with analysts, executives at Capital One attributed the cost surge to a seasonal rise in marketing expenses and increased operating costs as the company integrates previous acquisitions. They also pointed to an extra $90 million in litigation costs and about $40 million in asset write-downs along with other one-time costs.
"The increasing trend in non-interest expenses in 2011 resulted from choices we made to build our infrastructure, ensure that we are ready to integrate significant acquisitions and to prime the pump to restart growth," chairman and chief executive Richard Fairbank said on the call.
But his listeners were far from convinced. "I think people are still struggling with the expenses … at least based on the number of questions I'm getting," Nomura analyst Brian Foran said during the call.
Analysts also pointed out that Capital One just last quarter said that expenses wouldn't continue to climb.
"I know it's been beaten up a little bit here, but last quarter, I believe you were pretty clear that expenses would be flat sequentially," Stifel Nicolaus analyst Christopher Brendler said during the call.
"Is it slightly faster growth in expense than we might have anticipated? Perhaps," responded chief financial officer Gary Perlin.
"But again, we had better business growth opportunities, and we are trying to get ahead of what's coming, not just because of the acquisitions, but the higher regulatory expectations all around," Perlin said, referring to Capital One's deals to buy online bank
Unlike some of the banks that this week vowed to slash billions of dollars of costs in 2012, neither Capital One nor American Express promised cost cutbacks.
But American Express chief financial officer Dan Henry said the company was making good on a promised slowdown in expense growth.
"We provided guidance that we would slow growth in operating expense as we exited 2011, and we have," he told analysts during a conference call Thursday night.
Despite Thursday's focus on costs, KBW's Sakhrani points to "silver linings" at both companies in their fourth quarter results.
"I think on the whole, fundamental trends weren't that bad, especially in the U.S. And I think that's encouraging," he says.
Both companies faired relatively well when compared to megabanks like
Amex posted $1.19 billion in profit, up 12% from the prior year. U.S. card loans rose 4% from a year ago to $53.7 billion, and the net write-off rate for credit card loans accounting for principle only fell to 2.3% from 4.4% a year earlier.
Capital One reported a profit of $407 million, down almost 42% from the prior year largely due to the spike in costs.
But U.S. credit card loans climbed 5% to $56.6 billion, and credit card charge-off rates fell to 4.1% from 7.3% a year earlier.
