Capital One delivers earnings beat as merger scrutiny intensifies

Jeenah Moon/Bloomberg

Amid a high-stakes merger review process, Capital One Financial reported stronger-than-expected quarterly net income on Thursday, citing revenue growth in both its auto lending business and its flagship U.S. credit card segment.

The bank's third-quarter net income of $1.8 billion — or $4.45 per share — was roughly flat from the same period a year earlier. But it easily outstripped the $3.76 per share estimate of analysts surveyed by S&P.

The McLean, Virginia-based company benefited from a 6% year-over-year increase in period-end domestic card loans in the bank's held-for-investment portfolio. Auto loan originations totaled $9.16 billion in the quarter, up 23% from the same period a year earlier. 

Capital One released its quarterly results one day after the emergence of a new potential obstacle to the company's effort to acquire credit card rival Discover Financial Services.

On Wednesday, New York Attorney General Letitia James sought a judge's permission to issue a subpoena to Capital One as part of a previously undisclosed antitrust investigation of the pending merger.

Since the proposed $35 billion acquisition was announced in February, Capital One has said it expects the deal to close in either late 2024 or early 2025. Capital One CEO Richard Fairbank said Wednesday in the company's earnings release: "On the Discover acquisition, we continue to work through the regulatory approval process, and we're fully mobilized to plan and deliver a successful integration."

But the Biden administration has taken a more hawkish antitrust stance than previous administrations, and the Capital One-Discover deal is widely seen as a test case of the administration's aggressiveness in the banking sphere.

In addition to the New York state antitrust probe, Capital One is waiting on action by federal bank regulators and the U.S. Department of Justice, which can either approve or seek to block the company's proposed acquisition of Discover.

James' office is seeking, through the use of a subpoena, the same information that Capital One previously turned over to the Department of Justice's antitrust division as part of its merger review.

The New York attorney general went to court because Capital One has not signed a waiver that would allow the Justice Department to share company documents with Empire State officials. Capital One has indicated that its hands are tied, citing an objection by the Office of the Comptroller of the Currency, which is the bank's primary regulator.

The OCC maintains that granting the requested waiver would constitute an unlawful exercise of visitorial powers by the New York attorney general, in light of the fact that Capital One is a national bank. 

Discover, which is a state-chartered bank, has signed a similar waiver at the request of the New York AG's office, paving the way for relevant documents to be turned over.

In its court filing Wednesday, the New York AG's office expressed particular concern about the impact that a Capital One-Discover merger would have on competition in the subprime card market.

"Together, Capital One and Discover would control over 30% of the subprime credit card market, double the market share of their closest competitor," the filing stated.

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Whether antitrust analyses of the proposed merger should look at the narrower subprime credit card market, as opposed to the overall U.S. credit card market, has been a key point of debate since the Capital One-Discover deal was announced eight months ago.

If the merger gets approved, the combined company would own about 24% of all outstanding U.S. credit card loans, according to the New York attorney general's court filing.

A Capital One spokesperson said Thursday that the company will be responding to the New York AG's legal action through appropriate legal channels.

"We are well-positioned to obtain approval from our federal banking regulators under the appropriate federal banking laws, and believe we have made a strong case on the pro-competitive and pro-consumer benefits of this transaction," the Capital One spokesperson said.

But Ed Groshans, a policy analyst at Compass Point Research & Trading, wrote in a note to clients that the attorney general's action highlights the risk that the Justice Department will challenge the merger on antitrust grounds. Groshans noted that the Department of Justice has said it may challenge a merger on antitrust grounds following the approval of the relevant banking agency. 

"Our conclusion is that bank regulator approval may no longer matter," he wrote.

The blockbuster acquisition would make Capital One the largest credit card lender in the country. McLean, Virginia-based Capital One would also get Discover's payment rails, which its CEO has called "game-changing."

Over the summer, Capital One rolled out a community benefit plan, which would include both donations and money for community development financial institutions. The plan would take effect if the acquisition of Discover goes through.

But the merger continues to face opposition from numerous consumer groups, including the National Community Reinvestment Coalition and Americans for Financial Reform. Some Democratic lawmakers, including Massachusetts Sen. Elizabeth Warren and California Rep. Maxine Waters, have also expressed opposition to the proposed merger.