Capital One earnings up despite drag of joblessness
Credit card firm increases reserves for loan losses
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The nation's high unemployment rate continues to weigh on the credit card industry: Capital One Financial said Thursday that it had set aside an additional $296 million in the third quarter to cover loan losses.
Capital One chief executive Richard D. Fairbank said that the company was successfully weathering the recession but that he expects the U.S. jobless rate -- currently at 9.8 percent -- to continue to take a toll on its business.
"We expect the unemployment rate and, therefore, the domestic card charge-off dollars are likely to remain stubbornly high for most of 2010," Fairbank said during a conference call discussing the company's third-quarter results. "As unemployment goes, so goes the credit card business."
Still, the McLean-based credit card giant reported a $425.6 million profit (94 cents a share) for the third quarter, up 14 percent from the $374 million ($1 a share) it earned a year earlier. The results easily surpassed forecasts from Wall Street analysts, who had predicted earnings per share of 14 cents, according to a survey by Thomson Reuters.
"Despite their heavy concentration in credit cards, they made money and appear at this time to be staying on top of it," said bank industry expert Bert Ely. "However, credit card losses tend to be a function of the unemployment rate, so CapOne and the other major credit card issuers have got at least several more quarters of heavy losses on the cards."
The credit card segment reported net income of $291.7 million, down from $356 million a year ago but up from $172.6 million in the second quarter. The credit card segment results were largely driven by increased profit in the domestic credit card business.
Overall, the company said revenue rose 2.8 percent from a year earlier, to $3.6 billion. Capital One said net interest income rose 14 percent, to $2.05 billion. Its investment portfolio remained flat at around $37 billion.
Analyst Scott Valentin at FBR Capital Markets earlier this week raised his target price on Capital One shares to $40, from $27, on expectations that the company would beat Wall Street's forecasts.
The earnings release came after the market closed, but shares finished the regular trading session up $1.70, or 4.6 percent, at $38.33, then gained $3.27, or 8.5 percent, to reach $41.60 in after-hours trading.
