NEW YORK — Capital One Financial Corp. will thrive under a new, more-restrictive credit card law, its chief executive told investors Thursday.
It avoided some of the practices restricted by the law, which hampered its growth. Now it can compete on a level playing field, said Chairman and Chief Executive Richard Fairbank at the Sanford Bernstein Strategic Decisions Conference in New York.
However, loss rates on credit card loans will continue to rise, he said.
The new credit card law "is likely to cause a negative shock to industry revenues in the second quarter of 2010," Fairbank said, because of the reduced ability to increase interest rates for existing customers. How long the shock will last, and how much revenue will be lost, Fairbank would not say.
There might actually be a rise in industry revenue before the law takes effect in February, Fairbank said: "It's possible that (card industry) revenues may increase through the remainder of 2009 and into 2010 as banks and other card issuers re-underwrite and reposition existing portfolios to prepare for the implementation of the new law in early 2010."
Ultimately, though, some competitors have said the law will hurt their profitability. American Express Co. CEO Ken Chenault told investors during a conference call sponsored by CLSA's Calyon Securities last week that the law is "more negative than positive; there is no doubt about it." JPMorgan Chase & Co. CEO Jamie Dimon said the legal changes could cost the bank a combined $500 million this year and next. The law "does make it harder to manage risk," he said at the Bernstein conference Wednesday.
Fairbank did not give an estimate of how much the new law's restrictions will cost Capital One. He said he expects, in particular, the law's provision banning automatic overdraft charges and subsequent penalties will have a "significant revenue impact for Capital One."
But overall, he said, "I really, really looked forward" to the implementation of the law. He argued his company will likely regain its lead in underwriting and innovating new kinds of cards. The CEO said he felt as if his hands were tied behind his back in recent years because Capital One did not follow some of the industry's strategies, notable the use of long zero-percent teaser rate loans. The bank has also been skeptical of some of the practices now banned, such as double-cycle billing and universal default.
Capital One uses a proprietary model to issue cards and calculates interest rates that rely on literally hundreds of factors, rather than on FICO scores. That led to higher interest rates upfront for many Capital One customers and lower balances, particularly for customers with shaky credit.
Capital One has remained more profitable than many competitors in this credit cycle and it came through the stress test in good shape. But Capital One customers tend to keep balances closer to their credit limits, and overdraw that limit more easily.
However, now that borrowers will have to be evaluated by their ability to pay when they first get their card, "Capital One will have competitive advantages in up-front risk prediction using quantitative analysis," Fairbank said.
Analysts widely expect rising interest rates and the re-emergence of annual credit card fees. Rewards could be scaled back, or card lenders might introduce a membership fees for rewards, as American Express already does for its premium cards, or even introduce cards with an expiration date.
"I am sure the (research and development) departments at the card lenders are already working hard" to find ways to adjust for the new law, said William Blair & Co. LLC analyst David Long, but he was skeptical about Capital One's ability to outsmart the industry, as it did as a young company breaking into a fast-growing business.
When Capital One reported first quarter earnings in April, Fairbank said that he expects loss rates to soon exceed 10%. "In the near term," Fairbank said Thursday, "we expect provision expense to continue to be the single largest driver of overall results."