Capital One Financial Corp. was stung during the second quarter by the loss of overlimit fees as a result of the Credit CARD Act, and the law’s overall effects will continue to “pressure” revenues throughout this year, Richard Fairbank, Cap One CEO, told analysts during a July 22 conference call.
Domestic card-revenue margin “will continue to decline over the next few quarters” as the effects of the legislation play out with lower penalty-fee income and gradual repricing of card accounts, Fairbank said. Most of the law went into effect in February.
While the economy has improved, consumers “are paying down debt rather than spending and borrowing,” Fairbank said, contributing to ongoing weak consumer credit card demand.
Pending changes in debit card interchange rates are a “smaller-stakes issue” for Cap One compared with other card issuers primarily because debit cards are a relatively small business compared with the issuer’s credit card operations, Fairbank noted. Under the financial-reform legislation President Obama signed into law earlier this week, the Federal Reserve Board will review debit card rates and likely reduce them considerably later next year. Merchant acquirers pay issuers interchange when their cards are used to initiate purchases.
The McClean, Va.-based card issuer’s U.S. credit card unit generated net income of $483 million for the quarter ended June 30, up 189.2% from $167 million a year earlier, helped by a significant reduction in loan-loss reserves. Cap One set aside $675 million on loan-loss reserves during the quarter, down 48.1% from $1.3 billion a year earlier.
Total revenue for the domestic unit was down 3.4%, to $2.3 billion from $2.38 billion. Purchase volume on U.S. cards was $24.5 billion, up 3.8% from $23.6 billion a year earlier.
Average domestic loans during the quarter were $55.3 billion, down 16.1% from $65.9 billion a year ago.
The net charge-off rate on U.S. credit cards for the quarter was 9.49%, up 26 basis points from 9.23%. The delinquency rate on accounts at least 30 days past due rose two basis points, to 4.79% from 4.77% a year earlier.
Cap One’s international card segment earned $85 million during the quarter, up exponentially from $6 million a year earlier. Total revenue was $341 million, up 8.6% from $314 million a year earlier. Purchase volume for international cards was $2.06 billion, down 3.7% from $2.14 billion a year earlier.
The net charge-off rate on international cards was 8.38%, down 94 basis points from 9.32% a year earlier. The delinquency rate on accounts at least 30 days late was 6.03%, down 66 basis points from 6.69%.
As a company, Cap One posted net income of $608 million, up sharply from a $277 million loss during the same quarter a year earlier. The McLean, Va.-based card issuer’s total revenue was $3.9 billion, up 22.6% from $3.18 billion a year earlier.
