NEW YORK (Reuters) - Capital One Financial Corp (COF.N) will cut its quarterly dividend 87 percent to save $500 million annually as credit card losses increase and the economic outlook worsens, the company said on Monday.
Capital One, whose shares were up 5 percent, is reducing its quarterly dividend to 5 cents a share from 37.5 cents beginning in the second quarter — only one year after a 14-fold increase in the payout.
Analysts and investors had expected the move after bigger rivals JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) took similar actions in recent weeks to preserve capital, especially given the high exposure of Capital One to risky credit card holders.
The payout cut left BB&T Corp (BBT.N) as the largest U.S. regional bank that has not trimmed its dividend in the last year.
“It makes sense for these companies (banks) to preserve as much capital as possible until we understand very clearly that the trends are positive, not negative. In general, the markets perceive this as positive,” said Anton Schutz, president of Mendon Capital.
Capital One said its pro forma tangible common equity ratio — which measures a bank’s financial strength — at the end of February was slightly above the 4.6 percent it was at the end of 2008.
The bank, one of the largest U.S. issuers of MasterCard and Visa credit cards, said the dividend cut could increase its TCE ratio by a quarter percentage point.
“We work to anticipate and mitigate risks and to prepare for a range of possible downside scenarios,” Chief Executive Richard Fairbank said in a statement. “Given recent economic data, the broader economic outlook is somewhat weaker than expected and subject to a greater level of uncertainty.”
The bank — which received $3.55 billion in taxpayer funds last year — will soon be stress tested to see whether it needs additional capital. Sandler O’Neill’s analysts said “there is a strong likelihood” that regulators will require Capital One to take more government funds.
The firm once specialized in credit cards but expanded into branch banking in recent years after acquiring Hibernia Corp and North Fork Bancorp Inc. More recently, the February acquisition of Chevy Chase Bank expanded its presence in the affluent suburbs of Washington, D.C.
In January, Capital One posted a quarterly loss after writing down the value of its auto finance business and setting aside more money to cover bad loans. It forecast more credit losses this year as debt-burdened American consumers struggle with the highest unemployment rates in 25 years.
Last month, the McLean, Virginia-based company said the annual net chargeoff rate — a measure of credit defaults — for U.S. credit cards had risen to 7.82 percent in January from 7.71 percent in December, while the rate for loans at least 30 days delinquent increased to 5.02 percent from 4.78 percent.
American Express — the largest U.S. credit card company by sales volume — said its annual net charge-off rate rose to 8.29 percent in January from 7.23 percent in December, while the rate for loans delinquent at least 30 days increased to 5.28 percent from 4.87 percent.
Capital One said on Monday overall credit trends have been roughly in line with expectations through February.
JPMorgan analysts estimated Capital One’s credit card losses could climb to 11 percent by the second quarter, and that the bank could have to increase loan loss provisions by 55 percent. JPMorgan also estimated the bank will not be profitable until 2011.
Capital One’s stock was up 71 cents at $9.02 in late morning trading on the New York Stock Exchange after rising as high as $9.66 earlier in the session.
Shares of Capital One have fallen 73 percent this year to their lowest levels since 1996 amid growing concern about mounting bad loans and the need to cover them.
“While we see significant value in Capital One’s shares at current levels, the uncertainty in the economic and regulatory environment is greater,” said Moshe Orenbuch, an analyst at Credit Suisse
Editing by Lisa Von Ahn, John Wallace, Phil Berlowitz