Credit losses shrink at Capital One

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Strong consumer loan growth and improving repayment rates drove higher earnings at Capital One Financial in the second quarter.

The McLean, Va., company reported quarterly net income of $1.9 billion, which was up from $1 billion in the same period a year earlier. Capital One’s results were aided by a net gain of $400 million from the previously announced sale of most of the company’s home loan portfolio.

In its flagship U.S. credit card business, period-end loans held for investment rose to $100.7 billion, up 8% from the second quarter of last year. The net charge-off rate in the domestic card segment fell to 4.72% from 5.11% a year earlier.

During a conference call Thursday, Capital One Chief Executive Richard Fairbank said that credit performance in the credit card segment is being aided by the seasoning of the firm’s loan book. Capital One’s card business displayed strong growth between 2014 and 2016, and loss rates on credit card loans typically decline after two years or so.

But Fairbank also warned that he expects industrywide factors to have a countervailing impact on credit card losses.

“Given where we are in the economic and the competitive cycle, I think it’s very reasonable to expect that card industry losses probably have an upward tilt over time,” he said.

Capital One’s auto lending business was another bright spot in the second quarter. Period-end loans held for investment in the segment climbed by 8% to $55.8 billion. The net charge-off rate for auto loans fell from 1.70% in the second quarter of 2017 to 1.32% last quarter.

“Competitive intensity in auto is increasing, but we still see attractive opportunities to grow,” Fairbank said.

Results in Capital One’s commercial lending business were less encouraging. Commercial loans held for investment at June 30 ($67.6 billion) were flat compared with a year earlier.

The $364 billion-asset lender is reportedly in talks with Walmart about potentially taking over the retail giant’s store card portfolio. Those Walmart cards are currently issued by Synchrony Financial.

Fairbank did not comment Thursday on Walmart, but he did indicate that the company is interested in exploring ways to sign up more retail partners.

“However important card partnerships were in the past, I think we should all understand they are more important in the emerging digital world,” he said.

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