Capital One 'Pulling Back' Lending

Fourth-Quarter Profit Falls on Borrowers' Defaults and Delinquencies

Capital One, reporting a growing number of loans gone bad, said yesterday that it was pulling back on its lending activities as it enters a highly uncertain year.

The McLean company reported yesterday that profit in the fourth quarter came in 42 percent below the comparable period in 2006, as defaults and delinquencies rose.

"We're really seeing a consumer-led worsening" of the economy, Capital One chief executive Richard D. Fairbank said in a conference call. "Nobody knows how bad this environment will get."

Capital One has been closely watched for clues to how the troubles in the mortgage industry would spread to other kinds of lending. It is the nation's largest independent credit card issuer and also makes auto loans and has bank branches around the country.

"They are certainly signaling it's going to get worse in the near term," said Christopher Brendler, an analyst at Stifel Nicolaus. In the longer term, "it'll all be about what happens to the job market and what it's like for credit trends," he said.

Over the past year, Capital One stock lost nearly half of its value. It rebounded yesterday ahead of the earnings announcement, rising 11 percent to close at $44.20.

"We're acting decisively and aggressively to manage the company . . . in the face of cyclical economic head winds," Fairbank said. "We're pulling back on loan growth, focusing on our most resilient businesses and closely managing credit with the insights and experience we have garnered in prior economic downturns."

Capital One has been aggressively moving into new businesses, but that effort has been set back by the downturn. The company shuttered its mortgage lender in August and laid off 2,000 people, resulting in its first loss ever in the third quarter of 2007.

"There's no doubt that we, like other banks, will continue to face cyclical credit challenges in 2008," Fairbank said.

For the fourth quarter, the company reported profit of $226.6 million (60 cents a share), compared with $390.7 million ($1.14) in 2006. For the year, Capital One reported a profit of $1.57 billion ($3.97 ), compared with $2.41 billion ($7.62) in 2006.

But in some areas, the company actually increased profit. In credit cards, for instance, profit jumped 55 percent because of higher revenue from higher interest rates and stricter payment timetables, despite the growing number of accounts going bad.

Capital One said it expects up to 7 percent of credit card loans to go bad this month, which would be a recent high.

"We're confident in the decline off that peak for the first half of the year," Fairbank said.

The auto business was another story, recording a loss of $112.4 million, compared with a profit of $33.7 million a year earlier. Capital One said it was taking steps to refocus its auto loan business to protect itself down the road.

As it reported on Jan. 10, Capital One took a total of $1.95 billion in loan losses in the quarter, some of which was to cover loans that are expected to go bad this year. The company raised its 2008 estimate for bad loans to $5.9 billion from a range of $4.9 billion to the mid-$5 billion given last December.

Total revenue rose 28 percent, to $3.92 billion, in the fourth quarter.