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Capital One ‘gaining momentum’
Credit-card companies entering ‘a period of robust profitability’
Question of the Day
Capital One Financial Corp. is enjoying a resurgence in the credit card market as the recession and credit-card reforms fall into the rear view mirror.
The McLean-based company reported Thursday that net income jumped to $1.02 billion, or $2.21 per share, for the first quarter, compared with $636 million, or $1.40 per share, a year ago, and $697 million, or $1.52 a share, in the previous quarter.
The results exceeded expectations. Analysts in a FactSet survey estimated earnings of $1.48 per share, the Associated Press reported, while analysts in a Bloomberg survey predicted $1.54 a share.
“We are gaining momentum across the our business, and the period of shrinking loans through the Great Recession came to an end in the first quarter,” said Richard D. Fairbank, Capital One’s chairman and CEO. “Our solid first quarter results and our strong and resilient balance sheet put us in a good position to continue to generate capital and deliver strong and sustainable returns to our shareholders.”
Capital One has the largest network of branches and ATMs in the Washington area with about 240 locations. It purchased Chevy Chase Bank in 2008, and then renamed those locations as Capital One Bank last September.
Its stock price jumped to $53.26 on Thursday.
This could be just the beginning for credit card companies, said Chris Brendler, managing director at Stifel Nicolaus. He expects the industry to grow 1 percent by the end of the year, and 5 percent to 10 percent by the end of next year.
“We’re going into a period of robust profitability for the credit card industry in the next couple of years,” he said. “It’s going to be good times for these companies.”
Stifel Nicolaus has a target price of $64 a share for Capital One. “They still seem undervalued to me,” he said.
The industry seems to be emerging from massive federal reforms in recent years.
“We’re seeing the industry handle these regulations very well,” Mr. Brendler said.
Like many credit card companies, Capital One, took steps to lower losses from bad loans, which helped profits surge 60 percent in the first quarter, but that is only a short-term solution, analysts say. Going forward, the company will need to increase revenues by convincing consumers to keep the cash in their pockets and charge more to their cards.
Banks are cutting losses from bad loans because they are pickier about choosing clients. They are sending fewer mailing offers to high-risk consumers, Mr. Brendler said. They also have raised interest rates, especially for high-risk consumers, said Sanjay Sakjrani, an analyst with Keefe Bruyette & Woods.
“Now you’ve got a much cleaner pool of customers that are left,” Mr. Brendler said. “It’s getting much better than anyone expected.”
With less risk from their current customers, they can lower their reserves, which turns into higher earnings for investors, Mr. Sakhrani said.
© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.
About the Author
Tim Devaney is a national reporter who covers business and international trade for The Washington Times. Previously, he worked for the Detroit News, Grand Rapids Press, Portland Press Herald and Bangor Daily News. Tim can be reached at email@example.com.
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