UPDATE: This story includes commentary from Capital One's first-quarter earnings call and analyst notes.
Days after winning regulatory approval for its blockbuster acquisition of Discover Financial Services, Capital One Financial said that its expectations for what the integration will cost haven't changed.
The $35 billion transaction has been and will continue to be costly, but Capital One Chairman and CEO Richard Fairbank said on the company's first-quarter earnings call Tuesday that the $1.5 billion estimate for integration expenses during 2027 remain intact — except shifted out by about six months to account for the deal's longer-than-expected regulatory review.
Fairbank told analysts on a call Tuesday that he thinks this transaction is different from other acquisitions, where the goal is "to take two companies, squash them together and rip out the costs."
"I think that Discover brings us a growth platform, both on the network side and with respect to their card franchise, that allows us to preserve the best of what they do, leverage a lot of Capital One's capabilities that we bring and build something really special," Fairbank said.
The earnings report came in the wake of Capital One getting the green light to close its purchase of Discover, creating the largest credit card lender in the country. Fairbank reiterated Tuesday that the bank is "fully mobilized" to complete the transaction on May 18.
The McLean, Virginia-based company said Tuesday that it recorded diluted earnings per share of $3.45 in the first quarter, compared with a $3.68 consensus estimate of analysts. Discover-related expenses of $110 million and legal reserves of $198 million — up some two-and-a-half times from the prior quarter—dragged on earnings by a combined 61 cents per share.
Upon the closing of the Discover merger, the combined company will have $660 billion of assets. Capital One will own a massive chunk — estimated to be between one-fourth and one-third — of the subprime card market. And it will operate Discover's payment network, instead of having to use Visa's or Mastercard's — an element of the transaction that Fairbank has called "the holy grail."
But the road to getting there isn't completely nailed down. A huge portion of the integration will involve Capital One bringing Discover up to speed on the technology infrastructure it has spent years modernizing. Meanwhile, Discover will take Capital One "back to the world of data centers," Fairbank said on the call.
He added that his bank has experience ramping up the tech stack of a credit card company. However, running a payment network is new to Capital One, and "very complex and very high stakes," Fairbank said.
"The Capital One way is to lean into technology," Fairbank said. "And I'm sure that we will together go on a great journey with their network to help over time take a strong network that they built and modernize it."
Another key facet of the merger is Capital One's effort to increase acceptance of Discover's payment network internationally. Fairbank characterized this spending as a long-haul type of investment, measured in "a whole bunch of years."
Brian Foran, an analyst at Truist Securities, wrote in a note after the earnings call that the "knee jerk reaction" to Fairbank's comments about longer-term investments in global acceptance would be negative, as expenses could go up. But he argued that the spending could be a practice in patience.
"This has happened with Capital One before — building a brand twenty five years ago, building a high end card product fifteen years ago, and going all in on technology ten years ago," Foran said. "All required some pain upfront but were no-brainers in hindsight — maybe building a globally competitive network will also end up on the Wall Street No Brainer board when all is said and done."
Kyle Sanders, an analyst at Edward Jones, wrote in a note after the earnings announcement that he thinks it will take several years for the merger's benefits to manifest themselves, and that near-term integration challenges "will present obstacles."
Last week, the deal earned the approval of the Federal Reserve and Office of the Comptroller of the Currency, but regulators ordered Discover to pay more than $1 billion in fines and restitution in connection with the company's earlier overcharging of merchants.
When asked about recent regulatory developments, Fairbank said Tuesday on the call that Capital One knew risk management would be "a big investment," but the company hasn't changed its outlook on how much those efforts will cost.
State of the consumer
Capital One's first-quarter earnings report painted a relatively rosy picture of consumer financial health, showing stronger numbers than in the fourth quarter. Fairbank said Tuesday that "the U.S. consumer is in good shape," despite some "pockets" of groups feeling the pressures of inflation and high interest rates.
In the first quarter, Capital One released some $368 million in its allowance for loan losses, based on a more upbeat view of its domestic card portfolio. Its net charge-off ratio also dropped 19 basis points from the prior quarter, to 3.40%, though that figure was still 7 basis points higher than it was a year earlier.
Additionally, some 4.25% of the bank's domestic credit card balances were delinquent during the first quarter, a 25-basis point drop from the prior quarter.
The company's beat on analysts' expectations of adjusted earnings, which came in at $4.06 per share, was "all on credit, as revenues and expenses missed slightly," Truist Securities' Foran wrote in a note.
Executives at other banks have warned in recent weeks about uncertainty over how the Trump administration tariff policies and the related market turmoil will impact their customers. Many lenders have said that the economic uncertainty has muddled what had been a pretty optimistic outlook.
Fairbank said, though, that Capital One has some levers to pull for flexibility, if there is a recession.
"One of the sort of striking things about a credit card business in a normal recession is that consumers tend to pull back, and so you actually get some relief on the balance sheet side," Fairbank said.
