By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, January 11, 2008

Capital One Financial, the nation's largest independent credit card company, said yesterday that its 2007 profit would be significantly less than its earlier forecasts, new evidence that problems shaking the mortgage industry have spread to other kinds of lending.

The McLean company, which also makes auto loans and has bank branches nationwide, said the decline was the result of a slowing U.S. economy and a rising number of loans that consumers could not pay back.

Financial institutions have taken nearly $100 billion in loan losses since the onset of the mortgage-market crisis, according to data compiled by Bloomberg, and the pain is now being felt by credit card issuers. American Express yesterday also warned of lower profit and a deteriorating loan portfolio.

"If you're living paycheck by paycheck and your mortgage resets, and you suddenly have to pay hundreds of dollars more for your mortgage, something has to give," said Michael Tarsala, an analyst at Thomson Squawk Box. "You want to keep your house, but can you afford to keep your car and your credit cards under control?"

"This is the consumer kind of falling apart," Tarsala said.

Capital One, which is scheduled to issue fourth-quarter and full-year results Jan. 23, said its earnings for 2007 were likely to fall 20 percent short of forecasts, to $3.97 a share.

The company said it would take a $1.95 billion fourth-quarter charge to cover $1.3 billion in bad loans and $650 million in other loans that may default. Capital One also plans to take a $80 million charge related to a lawsuit over Visa-branded cards.

Despite the troubles, the company said its balance sheet remained strong at year-end, with more than $29 billion in available liquidity. Capital One said its financial position should allow it to continue to expand its credit card and other businesses through 2009. The company also said it plans to increase its dividend and resume a stock buyback program.

Capital One and other credit card companies have blamed their problems directly on the housing crisis. American Express said yesterday that it would take a pretax charge of $440 million to account for overdue loans.

"We did see some negative credit trends among U.S. consumers during December, particularly in California, Florida and other parts of the country most affected by the housing downturn," American Express chief executive Kenneth I. Chenault said in a written statement.

A report by Fitch Ratings yesterday said "credit card performance will noticeably deteriorate during the year, given spillover from residential mortgage, weaker economic trends, and higher levels of unemployment."

Capital One reported that the rate of bad loans and delinquencies rose again last month. The bad-loan rate in credit cards for December was 5.74 percent and delinquencies were 4.95 percent, compared with 5.34 percent and 4.93 percent in November.

Delinquencies and bad loans have risen for the past six months, but they remain below historical levels. The past few years have featured remarkably low interest rates and relatively few defaults and delinquencies.

Eric Wasserstrom, an analyst at UBS, said the challenge for Capital One is "whether we move to levels of loss that are much higher as a consequence of job losses and economic downturn."

Yesterday's profit forecast, which came in a news release issued shortly after midnight Wednesday, was another negative development for Capital One, whose share price has soared in recent years.

Capital One has expanded aggressively into banking, spending more than $18 billion to buy two banks in the past 2 1/2 years.

But the company was hit hard by the credit crunch that swept financial markets last summer. Its stock price has fallen 40 percent over the past year as several analysts cut ratings. Yesterday, its shares fell 43 cents to close at $42.92.

In October, Capital One announced its first quarterly loss ever, mostly from charges associated with the closing of its GreenPoint Mortgage subsidiary. That closing eliminated 1,900 jobs, and came after a $700 million restructuring that eliminated 2,000 jobs, about 6 percent of Capital One's workforce.

The company now employs about 30,000 people and has more than 700 retail bank branches in the Northeast, Texas and Louisiana.