UPDATE: This story includes commentary from Capital One's earnings call and from analysts' notes.
Capital One Financial reported a net loss of $4.3 billion in the second quarter as expenses related to its acquisition of Discover Financial Services put a hole in the bank's earnings.
Chairman and CEO Richard Fairbank said during the bank's earnings call on Tuesday that the costs of the integration will exceed the company's original $2.8 billion guidance, but he declined to specify how much higher the new expense outlook is.
He added that folding Discover into Capital One "is off to a great start."
"Importantly, the earnings power of our combined company that we envision on the other side of the deal integration is consistent with what we assumed at the time of our deal announcement, even though some individual variables have moved along the way," Fairbank said on the call.
The McLean, Virginia-based bank declined, though, to provide specific forecasts for the economics or "earnings power" of the deal, saying only that Capital One is "bullish."
Investors still seem to be on board with Fairbank's vision. Or at the least, they aren't jumping ship. Capital One's stock was up more than 3% after the market closed on Tuesday.
When Capital One first announced its plan to acquire Discover, the bank estimated the transaction value would total about $35 billion — the largest bank deal in 15 years. On Tuesday, Capital One disclosed that the fair value price of the acquisition, when it closed in May, was actually $51.8 billion.
The now-$659 billion-asset bank has acknowledged that the integration of Discover will be a marathon, not a sprint. Capital One said Tuesday that between April and June, it spent $9.4 billion on items related to the deal, including an allowance for Discover loans, fair value mark amortization, additional investment in risk management and moving technology stacks.
On top of integrating Discover, Capital One said it will continue expanding its investments in technology, which has been a decade-plus-long venture, as the bank seeks to build what Fairbank called "a technology company that does banking."
Capital One added that it's still on track to deliver the $2.5 billion in total net synergies it had previously estimated, due to cost savings and revenue synergies from the combination.
Fairbank has continually reiterated that owning Discover's payment network will be well worth the costs that accrue.
"We are on the cusp of even greater opportunities down the road," he told analysts on Tuesday. "These opportunities come both from this deal and also from Capital One's transformation to be at the frontier of a rapidly changing marketplace. These opportunities are exciting, but they will require significant investment to bring them home."
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The fact that the bank recorded a bottom-line loss wasn't a surprise, but the loss was steeper than anticipated. Capital One reported a diluted loss per share of $8.58, compared with analysts' consensus estimate of a $7.02 loss.
But analysts' estimates had been "all over the place," per a note from Truist Securities analyst Brian Foran earlier this month.
Excluding the Discover-related costs, Capital One's diluted earnings per share in the first quarter were $5.48, blowing past the consensus estimate of $3.72.
John Hecht, an analyst at Jefferies, wrote in a note Tuesday that the quarter marked "a great start to the next journey." He added that the balance sheet expansion "supports growth runway."
"As merger synergies and related opportunities start phasing in, we expect to see earnings accretion, incremental growth and improving metrics," Hecht wrote. "Down the road we see upside on capital return and growing revenues from the network."
The latest ramp-up in expenses comes after Capital One recorded about $110 million in Discover-related expenses during the first quarter of this year.
But Capital One has been focused on the long game.
"I think that Discover brings us a growth platform, both on the network side and with respect to their card franchise, that allows us to preserve the best of what they do, leverage a lot of Capital One's capabilities that we bring and build something really special," Fairbank said during the company's first-quarter call in April.
Legal reserves grow
For Capital One, buying Discover will cost more than just the price tag and the integration expenses. Federal regulators approved the deal in April, but they concurrently hit Discover with multiple enforcement actions and required the company to pay nearly $1.5 billion in fines and restitution.
And the road to the finish line was long and bumpy. The deal drew opposition from politicians, consumer advocacy groups and academics, who argued that the merger would violate antitrust laws, harm consumers and endanger financial stability.
Since the Trump administration took over bank supervision, regulators' attitude toward bank mergers and acquisitions has become more positive.
During the second quarter, Capital One set aside $41 million in legal reserves, which came on top of the $198 million in legal reserves it accrued during the first quarter.
In May, the bank agreed to pay $425 million to settle a class-action lawsuit involving the rates it paid on certain savings accounts. That same month, New York Attorney General Letitia James sued Capital One over the same issue.
The legal expenses came after the Consumer Financial Protection Bureau
