Capital One swings to $1.45 billion loss in 4Q

NEW YORK - Capital One Financial Corp. said Thursday it swung to a $1.45 billion loss in the fourth quarter as the bank set aside $2.1 billion for loan losses amid rising credit card delinquencies and took an $811 million impairment charge connected to its struggling auto finance business.

Capital One also said it expects the U.S. recession to continue to impact its results throughout 2009, especially as the economic downturn hurts the New York metro region.

Shares dropped $1.72, or 7.8 percent, to $20.22 in after-hours trading. Shares shed 4 percent, or $1.02, to close at $21.94 prior to the report.

After paying preferred dividends, the McLean, Va.-based credit card company lost $1.45 billion, or $3.74 per share, in the final three months of 2008. That compares with earnings of $226.6 million, or 60 cents per share, a year earlier.

Excluding discontinued operations, the company reported a loss of $1.4 billion, or $3.67 per share, compared with a profit of $321.6 million, or 85 cents per share.

Analysts polled by Thomson Reuters, on average, expected earnings of 33 cents per share. Analyst estimates typically exclude one-time, unusual charges.

Total revenue fell 19 percent to $3.17 billion from $3.92 billion, hurt by a decline in fee-based revenue.

Net chargeoffs, or loans the company considers won't be repaid, grew to $1.05 billion from $650 million in the fourth quarter of 2007. The rate of chargeoffs to total loans jumped to 4.21 percent from 2.66 percent. The rate of loans delinquent by 30 days or more to total loans also grew, rising to 4.37 percent from 3.66 percent.

Specifically, the chargeoff rate grew to 7.08 percent in the company's U.S. card business. Capital One expects this segment's chargeoff rate to increase to about 8.1 percent, up from the mid 7 percent rage previously forecast.

Chargeoffs and delinquencies worsened in the company's auto finance segment as well. Over the course of the last year, Capital One has scaled back its origination volume in the auto loan business to better navigate the recession. As a result, the company was forced to writedown the goodwill value of that business and recorded a charge of $810.9 million during the quarter.

Capital One added $1 billion to its allowance for loan losses during the quarter in anticipation of increasing chargeoffs in 2009. The allowance was built on the assumption that the U.S. unemployment rate will increase to 8.7 percent by year-end and that, on average, home prices will decline an additional 10 percent, Capital One said.

The total allowance for loan losses now stands at $4.5 billion.

Meanwhile, the company reported strong deposit growth during the quarter. Total deposits increased to $108.62 billion from $82.76 billion at the end of the prior-year quarter.

The deposit growth added $8 billion in liquidity to the company's balance sheet during the quarter, Capital One said. At year-end, the company had $40 billion in readily available liquidity.

"The primary source of strength in the near term will be our rock-solid balance sheet," said Gary Perlin, chief financial officer, during a call with investors. Bank deposits are a more attractive source of funding than any government aid program or other source the company might be eligible for, he said.

The bank also said it's comfortable with its capital ratios and dividend level. Its tier 1 capital ratio, a measure of financial strength, stood at 13.6 percent at year-end. Capital One last paid a quarterly dividend of 37.5 cents in November.

In December, Capital One announced plans to buy Bethesda, Md.-based Chevy Chase Bank for $520 million in cash and stock. The deal, which is expected to close in the first quarter, will add $11.6 billion in deposits, as well as branches in Maryland, Virginia and Washington, D.C.

For the year, Capital One reported a loss of $78.7 million, or 21 cents per share, compared with a profit of $1.57 billion, or $3.97 per share, in 2007.

Standard & Poor's Ratings Services subsequently revised its outlook on the ratings of Capital One and its bank subsidiaries to "Negative" from "Stable." The company's counterparty credit ratings were affirmed at "BBB+" and "A-," both investment-grade ratings.

The revision was based on the elevated credit losses and weak profitability, as well as the significant goodwill charge, the ratings service said.

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