Capital One Lost $112 Million in 1st Quarter

Capital One Financial yesterday reported a loss of $112 million in the first quarter as defaults on credit card loans rose more quickly than the company had predicted.

The McLean company also offered insight into the decline in lending by major banks, saying that it is increasingly choosing to invest money in securities rather than making new loans. The company's investment portfolio grew by $14.1 billion over the last year, while its loan portfolio grew by $5.8 billion.

Gary Perlin, the company's chief financial officer, said investing was currently safer than lending, and that Capital One would wait for economic conditions to improve before shifting the money back to lending.

"Our plan is to eventually shrink the investment portfolio," Perlin said, "by taking advantage of attractive lending opportunities when the market returns."

Capital One reported a first-quarter loss of 45 cents a share, compared with a profit of $1.47 a share, or $548.5 million, during the same period last year.

The results were viewed by financial analysts as more representative of the problems besetting the banking industry than the profits reported by larger firms, including J.P. Morgan Chase and Bank of America. Those companies also struggled with losses in credit card and retail banking operations, but were able to post profits based on the strong performance of their investment banking operations.

"Capital One's earnings announcement shows that the recent run of positive earnings from other financial service players should not be misinterpreted as the end of Wall Street's financial woes," wrote Red Gillen, an analyst with Celent.

The company said losses in its credit card portfolio reached 8.4 percent in the first quarter, above the company's projected 8.1 percent. The company said it expected the loss rate on its domestic credit card portfolio to surpass 10 percent in the coming months.

Capital One operates one of the nation's largest credit card businesses. The company has moved increasingly into retail banking, allowing it to use deposits as a cheap source of funding for its loans. The company acquired Chevy Chase Bank in late February, creating a retail presence in the Washington area for the first time. The deal helped Capital One increase its reliance on deposits from 52 percent of funding last year to 65 percent this year.

Capital One accepted a $3.56 billion investment from the Treasury Department in November, but Perlin said the growth in deposits has allowed the company to refrain from borrowing from any of the government's other emergency aid programs.

The company also said it did not take advantage of recent changes in accounting rules that have allowed some banks to report higher values for troubled assets.