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Capital One in The Red for '08

The McLean credit card issuer lost $1.42 billion in the quarter, $46 million for the year.
The McLean credit card issuer lost $1.42 billion in the quarter, $46 million for the year.

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By Binyamin Appelbaum
Washington Post Staff Writer
Friday, January 23, 2009

Capital One Financial yesterday reported the first annual loss in its history, as a difficult fourth quarter left it with a loss of $46 million for 2008.

The McLean credit card giant reported a loss of $1.42 billion in the last three months of the year, slightly more than it earned during the first nine months. And it joined a growing chorus of banks in predicting that 2009 will be even worse as an accelerating recession increases the ranks of borrowers unable to make payments. Capital One had predicted $5.6 billion in loan losses for 2008; it ended up losing $6.4 billion, and the company now says it expects $8.6 billion in loan losses this year.

The company also said its planned acquisition of Chevy Chase Bank would create a further strain by significantly increasing its loan portfolio without a commensurate increase in the amount of capital held against possible losses. The company said an important measure of that relationship would drop below its internal standards.

Still, Capital One executives said the financial results showed the company's relative strength as some rivals post much larger losses.

Chief executive Richard D. Fairbank said that credit card lending remained lucrative and that there is no other kind of lender he'd rather be.

"I continue to believe it will be the most resilient lending business in the downturn," Fairbank said.

Investors appear less sanguine. Capital One's shares have dropped 31 percent this year, closing at $21.94 yesterday on the New York Stock Exchange. The stock lost 4.4 percent yesterday.

The fourth quarter was difficult. Revenue fell sharply from the fourth quarter of 2007, and the company set aside an additional $1 billion to cover projected losses. The company's $1.42 billion quarterly loss amounted to $3.74 per share, compared with a $226.6 million profit (60 cents a share) in the fourth quarter of 2007. In 2008, the company lost $46 million, or 21 cents per share. It recorded a profit of $1.57 billion ($3.97 a share) the year before.

Capital One has diversified in recent years from its roots in credit card lending, and the strategy has both helped and hurt the company. The auto lending business cratered, leading Capital One to scale back lending by 50 percent and to record an $811 million charge reflecting its judgment that it overpaid for acquisitions.

At the same time, the company's retail banking business allowed it to fund its credit card lending with consumer deposits even as the securitization market collapsed, and Capital One recorded only a small loss from retail banking. The company has bank branches mostly in Louisiana, Texas and the New York metropolitan area.

It said its deposit base grew 31 percent last year.

The success drove the decision to acquire Chevy Chase, giving Capital One a retail presence in the Washington area for the first time. The deal is expected to close mid-year.

Fairbank yesterday called the Bethesda company "a truly excellent local bank."

The Treasury Department has invested $3.56 billion in Capital One as part of a program intended to revive lending. But the company reported that the number of credit card customers in the United States has fallen by 3.6 million, or 9 percent, from the end of 2007. The number of customers also was down from the end of the third quarter. The declines in auto lending were even more severe.

Executives said on an evening conference call with analysts that the company was focused on preserving its strength in the face of a worsening economy. For instance, it now expects that home prices in major cities will fall 35 percent from peak values, worse than the 31 percent decline the company projected just three months ago.

Capital One, known for its ubiquitous advertising, cut its marketing spending by more than $200 million, or 17 percent, in 2008.


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