Capital One's triple whammy

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Several one-time charges hurt third-quarter earnings at Capital One Financial, which reported an 11% decline in net income.

The expenses, which totaled $318 million on a pretax basis, were connected to a long-running sales scandal in the United Kingdom, the start of a new credit card partnership with Walmart and a recent, well-publicized data breach.

Capital One recorded net income of $1.33 billion, which was down from $1.50 billion in the third quarter of last year. Earnings per share fell by 10%, but the company said they would have risen by 11% if not for the unusual items.

The largest charge was a $212 million pretax reserve build for customer refunds that Capital One expects to pay in the U.K., where the company offers credit cards. The refunds are intended for British consumers who were improperly sold insurance that was designed to cover loan payments in certain circumstances where borrower could not pay. U.K. consumers had until Aug. 29 to submit complaints.

Capital One Chief Financial Officer Scott Blackley said during an earnings call Thursday that the company received more complaints before the deadline than it had expected.

The McLean, Va.-based firm also recorded an $84 million pretax charge in connection with the Walmart credit card deal. Last year Capital One won the right to issue Walmart credit cards, and the card issuer subsequently worked out a deal to purchase older loans that Synchrony Financial had previously made to Walmart credit card users.

The existing portfolio’s sale followed the filing of a lawsuit in which Walmart alleged that Synchrony underwrote the loans in a way that led to significant credit risk exposure.

Capital One CEO Richard Fairbank said Thursday that delinquency rates in the company’s domestic card portfolio are expected to rise by about 25 basis points at the end of the fourth quarter as a result of the addition of the Walmart portfolio. But he also noted that the Bentonville, Ark.-based retail giant has agreed to shoulder a significant portion of the losses on loans that go bad.

Capital One also recorded $22 million in pretax expenses in connection with a hacking incident, disclosed over the summer, in which data on more than 100 million people was compromised.

The $378.8 billion-asset company, which has previously estimated that the hack would eventually cost it $100 million to $150 million, said Thursday that it now expects the total cost to be at the low end of that range.

The various one-time charges overshadowed Capital One’s quarterly results, which were mixed.

At the end of September, loans in the company’s domestic credit card business were up 3%, auto loans were up by 5%, and commercial loans were up by 7%, in comparison with the same time a year earlier. But net interest income fell by 1% as margins on the company’s loans contracted.

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Credit cards Earnings Auto lending Penalties and fines Credit quality Consumer lending Capital One