Capital One Misses On Q4 Revenue As Card Loans Increase

Capital One’s domestic card loans increased 8 percent in the fourth quarter of 2018, the bank said on Tuesday (Jan. 22) as company executives gave an update of its card deal with Walmart.

The financial institution (FI) said that, as of the end of Q4, the domestic card loans ending balance stood at $107.4 billion, an increase of $5.8 billion. Credit card loans increased 5 percent to $116.4 billion, an increase of $5.7 billion. The net charge-off rate decreased to 2.67 percent, down from 2.89 percent in the fourth quarter of 2017. The bank also reported that non-interest expenses increased 10 percent to $4.1 billion, a jump Capital One said was mainly due to a 65 percent increase in marketing expenses.

For Q4, the bank said provision for credit losses increased 29 percent to $1.6 billion.

During the post-earnings conference call on Tuesday, Capital One CEO Richard Fairbank said the FI had entered into a “definitive agreement” with Walmart to acquire its co-branded, private-label credit card receivables “at an attractive price and terms.” He did not detail the price and terms, but said the deal included “$9 billion” worth of receivables.

Last year, Walmart said that Capital One would become the exclusive issuer of Walmart’s co-branded, private-label credit card program in the U.S. The partnership will begin Aug. 1, 2019.

Capital One takes over for Synchrony Financial, which had a nearly 20-year relationship with the retail chain. While Synchrony has lost this partnership with Walmart, which accounted for more than 10 percent of the interest and fees the bank earned on loans last year, Walmart previously said it expected to fully replace the earnings-per-share (EPS) impact through one of two options: selling the portfolio to Capital One or converting qualifying accounts to a Synchrony-branded general purpose credit card.

Fairbank said the acquired portfolio has “high credit losses,” but added that, under the deal, “our share of credit losses is fixed at a low percentage throughout our partnership, [and] our share of revenue steps up after one year.”

After the step-ups, he said, the bank’s share of revenue will be around “three times our share of credit losses.” During the Tuesday call, Fairbank also said the “impact of onboarding will be a modest benefit to the charge-off rate of our domestic card business.”

Capital One said its Q4 revenue increased 1 percent year over year to $7 billion. That was lower than the $7.08 billion expected by analysts. The bank also reported an EPS of $1.87, not including non-recurring gains, and that came in below analyst expectations of $2.41.