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Capital One's Profit Plunges 40 Percent

The McLean financial giant said it expects the trend to continue.
The McLean financial giant said it expects the trend to continue. (By Mark Lennihan -- Associated Press)
By Zachary A. Goldfarb and Alejandro Lazo
Washington Post Staff Writers
Friday, July 18, 2008

Capital One, one of the nation's largest credit card companies, said yesterday that profit in the second quarter fell by 40 percent and it warned that more customers are defaulting on their loans.

The McLean financial giant, which in recent years has diversified operations by adding retail banking and auto lending services, blamed the economic downturn for the rise in defaults and said the trend is expected to continue through the end of the year.

"We view the scenario as consistent with the views that the U.S. is in recession," Gary Perlin, Capital One's chief financial officer, said in a conference call with analysts.

Financial institutions of all sizes have been battered by the slowdown. Three local banks yesterday reported that they too experienced declining profits and some warned of more challenges ahead.

Profits at Virginia Commerce Bancorp of Arlington dropped 29 percent, and the bank said it would seek to raise more capital. Provident Bankshares of Baltimore, which raised cash by issuing stock and selling bonds earlier this year, reported a 2.5 percent decline in earnings. BB&T, based in North Carolina and one of the largest banks in the Washington area, said profit declined 6 percent.

"Without a doubt, the banking industry both nationally and locally is struggling to varying degrees through a difficult credit and liquidity cycle," Peter A. Converse, chief executive of Virginia Commerce, told analysts in a conference call.

Capital One said its profits in the second quarter were $452.9 million ($1.21 per share), compared with $750.4 million ($1.89) in the similar period in 2007. Revenue declined to $3.35 billion from $3.51 billion a year ago, as the company favored caution over growth in the face of economic difficulty.

"We've tightened underwriting standards across the board," chief executive Richard Fairbank told analysts. "We expect continued pressure as the economy continues to weaken."

The percent of credit card accounts that went into default rose to 6.26 percent from 3.56 percent in the same period in 2007. The company said it expects the figure to rise to 7 percent by year's end. In response, the company has raised interest rates for a variety of credit cards.

Other parts of the business -- such as retail banking and auto finance -- also showed weakness.

Capital One has been aggressively moving into new businesses and has spent $18 billion in past years to buy retail banks with consumer deposits. One analyst said that has been a plus during the downturn, giving them an added source of capital.

"It's definitely helped them because they have access to deposit funding when the biggest problem [for many banks] is access to funding and securitization problems," said Christopher Brendler, an analyst at Stifel Nicolaus.

Capital One issued its earnings after the stock markets closed. Earlier in the day, investors pushed up the company's shares by $5.27, or 14 percent, to $42.55.

Virginia Commerce, which operates 26 community banks in Northern Virginia, reported profit of $4.9 million (18 cents per share) for the quarter ended June 30, compared with $6.9 million (25 cents) in the second quarter of 2007. The bank created a niche for itself making construction loans for residential developments in Northern Virginia during the housing boom, including Prince William and Loudoun counties.

Now those areas have been hard hit and Virginia Commerce has been setting aside more money to cover loans it expects to default. About 15 percent of the bank's total loan portfolio consists of construction loans made to residential builders in Northern Virginia.

Converse told analysts the bank was seeking to raise between $25 million and $50 million. Shares for Virginia Commerce dipped 1.3 percent, or down 6 cents, to close at $4.72.

Provident, which operates 142 branches in the Washington area, Baltimore and elsewhere, reported profit of $15.1 million (41 cents per share), down from $15.5 million (48 cents) in the comparable quarter a year earlier. In April, the bank raised $115 million in cash by issuing $65 million in new shares and $50 million in bonds. Shares of Provident soared 26.9 percent to close at $7.70.

BB&T, the fourth-largest bank in the Washington area, said profit fell to $428 million (78 cents per share) from $458 million (83 cents), a year earlier, largely as a result of loans tied to a the housing slump. The company's shares jumped $3.13, or 12.78 percent, to $27.63.

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