- The Washington Times - Friday, January 11, 2008


Capital One Financial Corp. said its 2007 earnings will fall short of its previous expectations, sending its stock to a 52-week low and reaffirming the fact that turmoil in the nation’s credit markets continues.

The McLean-based credit card company said yesterday that increased loan delinquencies and additional legal reserves in the fourth quarter will cause the company to report a fourth-quarter profit of 60 cents per share and full-year earnings of about $3.97 per share, below its prior forecast of “about $5 per share.”

The news, announced early yesterday, confirmed fears by some analysts that the collapse of the subprime mortgage market has hurt other credit classes.

Capital One fell 43 cents to $42.92. The stock touched as low as $38.85 yesterday, its cheapest trade since 2003.

The news also renewed jitters that slowing economic growth may hurt upcoming corporate earnings reports more than previously thought.

The housing slump, high oil prices, tighter credit and rising unemployment are making it harder for consumers to pay their bills. Analysts expect most major U.S. financial companies to post lower profits, or losses, when they report fourth-quarter results this month.

“[Yesterday’s] announcement by Capital One is really the first shoe to have dropped,” said Red Gillen, senior analyst with Celent, a Boston-based financial research and consulting firm. “Given the economy’s flirtation with recession, consumers’ ability to repay these inflated bills is under more pressure than in previous years.”

Capital One, a credit card issuer that continues to expand into retail banking, said it is taking a $1.9 billion provision for loan losses in the fourth quarter, including about $1.3 billion it expects to write off as uncollectable. It also is adding about $650 million to its charge-off allowance because of recent delinquencies in its consumer lending businesses and “continued deterioration” of approximately $700 million of home equity lines of credit originated by its GreenPoint Mortgage unit, which shut down in August.

The company said it now expects charge-offs of about $5.9 billion this year because of expectations that the U.S. economy will be weaker. That is up from the $4.9 billion to $5.5 billion Capital One predicted in November.

On Wednesday, Countrywide disclosed that the percentage of borrowers who missed payments on home loans last month rose. The nation’s biggest mortgage lender said about 6.96 percent of the loans in its servicing portfolio were delinquent last month, up from 5.02 percent in December 2006.

In its announcement yesterday, Capital One said it had initiated a $60 million legal reserve for damages in pending litigation involving the Visa credit card network, of which Capital One is a member.

The company previously said it was taking a fourth-quarter pre-tax charge of about $80 million for liabilities in connection with the antitrust settlement that Visa reached in November in American Express Co.

“Quite simply, we believe there is value in the franchise that will either be realized through better earnings and valuation improvement, or an acquisition,” Calyon Securities analyst Craig Maurer wrote in a research note. “We do not expect this to occur over the next six months.”

Capital One is scheduled to report fourth-quarter results Jan. 23.

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