Capital One’s Profit Eroded by Walmart Deal Collapse, Discover Uncertainty

It’s earnings season for America’s biggest financial services companies and institutions.

So far, the common theme has been a softening of consumer credit and mixed signals around corporate spending. But every business is different — and sometimes a black swan will rear its head.

That’s what Capital One Financial’s leadership told investors about their own second-quarter 2024 earnings, explaining on Tuesday’s (July 23) earnings call that the company’s profit fell substantially in the second quarter as it set aside more money to cover losses on loans — particularly those related to the end of its partnership with Walmart.

Provision for credit losses increased 57%, from $1.2 billion to $3.9 billion, per the company’s financials.

The 57% jump in credit loss provisions, a surprise to Wall Street analysts, was due to Capital One setting aside more cash to cover loan losses than expected, after ending a program to issue credit cards exclusively for Walmart. As part of the agreement’s dissolution, Capital One will be responsible for servicing the loan portfolio.

Capital One reported net income that was down 58% to $597 million for the most recent quarter. This compares to net income of $1.3 billion in Q1 2024, and $1.4 billion in Q2 2023.

“We posted strong second quarter results while continuing to lean into opportunities to grow and further strengthen our domestic card and national consumer banking franchises,” said Richard D. Fairbank, founder, chairman and CEO of Capital One.

Read more: Bank Earnings Show Companies Opting to Spend With Caution

Within commercial banking, Capital One’s ending deposits were down $1.9 billion, or 6%, quarter-over-quarter; while average deposits were down $1 billion, or 3%, quarter over quarter.

Revenue within commercial banking was “substantially flat quarter over quarter,” executives said.

For consumer banking, Capital One’s ending deposits were up $19.2 billion, or 7%, YoY. The company’s auto loan originations were up $1.3 billion, or 18%, YoY. Overall, revenue for Capital One’s consumer banking division was down $221 million, or 9%, YoY.

Delving Into the Discover Deal

Capital One spent $31 million on costs related to its integration of Discover Financial Services during the second quarter, per its financials.

“We’re ‘all in’ and working hard to complete the Discover acquisition, which will create a consumer banking and global payments platform with the potential to enhance competition, deliver compelling financial results and create significant value for merchants, small businesses and consumers,” Fairbank said to investors on Tuesday’s call.

But the Discover deal may have some challenges facing it ahead.

It was on Friday (July 19) that Congresswoman Maxine Waters, D-Calif., the top Democrat on the House Financial Services Committee (HFSC), testified against the proposed merger during a virtual meeting convened by the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

Should the $35 billion acquisition be finalized, it would give Capital access to Discover’s credit card network, the fourth largest in the United States. Capital One and Discover announced the planned acquisition on Feb. 19, saying it will create a global payments with 70 million merchant acceptance points in more than 200 countries and territories.

Waters’ remarks on the proposed merger came three days after Capital One announced a $265 billion community benefits plan that it developed with four community groups and said that a combination of the bank with Discover would provide more benefits to underserved communities than the organizations would offer separately.

Read more: Capital One CEO Calls Discover Deal ‘Singular Opportunity’

As PYMNTS Intelligence has found, 65% of the U.S. population lives paycheck to paycheck, the highest share we have seen in two years. Eight out of 10 consumers earning less than $50,000 annually say they live paycheck to paycheck.

And while Capital One is known for marketing itself to less affluent consumer segments compared to financial institutions like American Express, executives told investors that they were focused on going after the top of the market, too.

“We want to build a franchise at the top of the market with heavy spenders. Every year, as we get more traction, we reach just a little bit higher. These customers are very attractive,” Fairbank said. “Competition in things like rewards has certainly heated up over the past couple years.”