January 23, 2009 / 1:00 AM / 11 years ago

Capital One posts loss after impairment, shares fall

NEW YORK (Reuters) - Capital One Financial Corp (COF.N), a bank and credit-card issuer, posted a fourth-quarter loss on Thursday after writing down the value of its auto finance business, and setting aside more money to cover bad loans.

The Capital One headquarters in McLean, Virginia, August 21, 2007. REUTERS/Kevin Lamarque

Rating agency Standard & Poor’s cut Capital One’s outlook to negative, indicating a downgrade is more likely, as the company forecast higher credit losses in 2009.

The bank’s shares fell 7.7 percent in post-market trading.

The McLean, Virginia-based company swung to a fourth-quarter net loss of $1.4 billion, or $3.74 per diluted share, compared with net income of $226.6 million, or 60 cents per diluted share, a year earlier.

The company, one of the largest issuers of MasterCard Inc(MA.N) and Visa Inc (V.N) credit cards, recorded a noncash impairment of goodwill of $810.9 million related to the revised outlook for its auto finance business.

In addition, Capital One set aside another $1.0 billion for loan losses, anticipating a further deterioration of its credit portfolio that is under pressure as unemployment rises.

“We expect core earnings to continue to be pressured as credit losses in the core U.S. and international credit card portfolios rise in 2009,” Standard & Poor’s said in a report. “We believe higher credit costs will drive earnings lower in 2009.”

Capital One’s chairman and chief executive, Richard Fairbank, said ,”The economic downturn was the key driver of our fourth quarter ... and we expect that the recession will continue to impact our results throughout 2009.”

In the U.S. card business, charge-offs — a measure of consumer default — increased to 7.08 percent in the fourth quarter from 6.13 percent in the third quarter.

The company expects loan losses from U.S. cards to increase to 8.1 percent in the first quarter.


The bank estimated U.S. unemployment would rise to 8.7 percent by the end of 2009, from the current 7.2 percent, and home prices would fall another 10 percent, adding pressure on debt burden consumers.

Credit card companies have been closing accounts, cutting credit lines and raising interest rates trying to inoculate themselves from a wave of expected consumer defaults.

Americans are struggling with a deepening recession and the highest unemployment rates in 16 years.

Conditions in the United States could get much worse, with a Reuters poll of economists forecasting that the economy could have shrunk by as much as 6 percent in the fourth quarter. The same poll showed they expected the economy to keep declining for the next six months.

“As we look forward, we can’t be certain how much or for how long these economic headwinds will continue to impact our credit performance and outlook,” Gary Perlin, Capital One’s chief financial officer, said in a conference call with analysts.

Capital One’s total revenue fell 19 percent to $3.17 billion, while deposits rose to $108.6 billion at the end of the period.

The firm once specialized in credit cards, but expanded into branch banking in recent years after acquiring Louisiana’s Hibernia Corp and New York’s North Fork Bancorp Inc.

The company agreed to buy Chevy Chase Bank for $520 million last month, expanding its retail deposit base in the affluent suburbs of Washington.

The bank posted a full-year net loss of $46 million, or 21 cents per share, compared with net income of $1.6 billion, or $2.28 per share, in 2007.

Capital One’s shares fell 7.7 percent to $20.24 in after-hours trading. The stock closed down 4.4 percent to $21.94 on the New York Stock Exchange.

The stock has dropped about 37 percent this year, almost in line with a 38 percent decline in the KBW Bank Index .BKX.

Editing by Jeffrey Benkoe, Leslie Gevirtz

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