Capital One Profits Rise, But Miss Analysts' Forecasts
Capital One , a bank and credit-card issuer, said on Thursday that fourth-quarter profit rose nearly 40%, but missed analysts' forecasts.
The company, based in McLean, Va., also forecast 2007 earnings well below analyst estimates, citing a difficult banking environment. The company's shares edged lower after the weaker-than-expected results.
Capital One said net income rose to $390.7 million, or $1.14 a share, from $280.3 million, or 97 cents a share, a year earlier. Analysts' expected Capital One to earn $1.24 a share, according to a consensus estimate compiled by Thomson Financial.
Total revenue was nearly $3.1 billion, up from $2.7 billion in the fourth quarter of 2005.
"We knew it would be a messy quarter and it is," said Chris Brendler, an analyst at Stifel Nicolaus in Baltimore. "The core Capital One credit card, auto lending and international businesses were weaker than I thought and key metrics like revenue growth look weaker."
Capital One's credit card operations in the United Kingdom continue to perform poorly, pulling net income in the global financial services segment down to $2.1 million in the fourth quarter, down from $7.1 million in the same quarter last year.
Banks have broadly suffered in recent quarters, after a protracted period of short term interest rates being close to long-term interest rates, crimping lending margins. Meanwhile, credit losses from consumer borrowers are edging higher. Credit losses and the interest rate environment squeeze Capital One on both the retail banking and credit card lending side.
These difficulties contributed to Capital One's profit outlook for 2007 of $7.40 to $7.80 a share, well below analysts' expecations of $8.11. That implies little growth or perhaps even a decline from 2006's full year level of $7.62 a share, despite its $13.2 billion acquisition of North Fork Bancorp in December.
The outlook includes "expectations for a continued challenging interest rate environment and cyclical pressures in the mortgage industry," a return to a more normal level of credit losses in its unsecured national lending business, and the repurchase of $2.25 billion of the company's shares beginning in the second quarter, the company said in a statement.
Capital One, which at the outset of 2006 was known principally as a credit card lender, made two big acquisitions in the past year to become a bank, too.
In addition to North Fork, which operates banks in New York, New Jersey and Connecticut, the company purchased the New Orleans-based Hibernia Corp., with 300 branches in Texas and Louisiana, for $4.9 billion, in November of 2005.
The deals, which make Capital One the 11th-biggest bank in the U.S. by deposits, drew a mixed response from Wall Street.
The stock was flat for the first half of the year, then plunged in the summer because of credit concerns, especially in the U.K. Investors are also worried about Capital One's ability to integrate its purchases of banks. Capital One's stock lost about 10% last year, while the Standard & Poor's 500 posted a 13.6% gain.