Surprise Surge in Card Defaults Sinks Capital One, Discover

  • Capital One’s card write-off rate is highest in six years
  • Net income at both lenders dropped in the first quarter

Capital One Financial Corp. and Discover Financial Services fell after a surge in soured credit-card loans hurt profit at the two lenders.

Shares of Capital One dropped 2.9 percent to $83.06 and Discover slid 3.1 percent to $65.23, the two worst performers Wednesday in the 65-company S&P 500 Financials Index. Synchrony Financial, the private-label credit-card issuer that reports first-quarter results on Friday, was third worst.

Capital One’s provisions for losses in the credit-card unit, the firm’s biggest business, jumped 29 percent to $1.7 billion in the first quarter from the preceding three-month period, the McLean, Virginia-based company said Tuesday in a statement. The write-off rate rose to 5.02 percent, the highest in almost six years.

“We remain cautious on both Capital One and Discover given our view of elevated provisioning and rewards expenses truncating net income growth over the near term,” Eric Wasserstrom, an analyst at Guggenheim Securities LLC, said in a note to clients.

Discover’s net charge-off rate for credit cards climbed to 2.84 percent, the highest level since at least the fourth quarter of 2014, according to a presentation posted on the company’s website. Discover’s provisions for credit losses increased 1.4 percent to $586 million.

Profit Estimates

Capital One said write-offs in the U.S. card unit will probably be in the “high 4 percent to around 5 percent” range for the year, worse than previously forecast.

The bank said it expects earnings per share growth of 7 percent to 11 percent this year, the first time the company has given that type of guidance in more than a decade. The full-year efficiency ratio is expected to improve to 51 percent from its previous forecast of 52 percent, the firm said on a call with analysts.

Net income at Capital One tumbled 20 percent to $810 million, or $1.54 a share, according to the statement. Adjusted earnings per share, which exclude a payment to a U.K. customer reserve fund, were $1.75, missing the $1.92 average estimate of 23 analysts surveyed by Bloomberg.

At Discover, net income dropped 2 percent to $564 million, or $1.43 a share, the Riverwoods, Illinois-based lender said Tuesday in a statement. That was in line with analysts’ average estimates.

“We’re not losing any sleep that we can’t manage the credit situation we’re confronted with right now,” Mark Graf, chief financial officer at Discover, said on a conference call with analysts. “While charge-off rates have risen, they remain quite low by historical standards.”

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