Capital One Financial Corp.’s net income plunged 90 per cent on higher credit loss reserves from its purchase of HSBC Plc’s U.S. credit card portfolio, but the lender said it expected the deal to have a modest impact on reserves in the current quarter.
Capital One has spent much of the past decade transforming itself from a specialty credit card lender dependent on bond market funding into a bank that relies on deposits.
The company last year bought online deposit taker ING Direct, making it the fifth-largest U.S. bank by deposits, and bulked up its credit card division with a deal to buy HSBC’s domestic business, totalling $30-billion (U.S.) in credit card loans.
McLean, Virginia-based Capital One, which gets over half of its revenue from credit cards, recorded net income for the second quarter of $92-million, or 16 cents per share, down from $911-million, or $1.97 per share, a year earlier.
From continuing operations, it earned 33 cents in the quarter, net of tax.
Total net revenue was up 2 per cent at $5.1-billion.
Provision for credit losses rose to $1.68-billion from $343-million. Provisions in the quarter included a $1.2-billion allowance build for the non-impaired loans brought on to the balance sheet as a result of the HSBC U.S. card acquisition.
But Capital One, which had warned of a ‘significant build in allowance’ in the second quarter due to the integration of the new units, said it does not expect to see a similar impact on reserves in the current quarter.
Period-end loans in the domestic card business increased by $27.6-billion to $80.27-billion, largely due to the addition of the HSBC U.S. card portfolio.
The bank agreed to pay $210-million earlier on Wednesday to resolve charges by regulators that its call-centre representatives misled consumers into paying for extra credit card products.
The enforcement action, announced by the Consumer Financial Protection Bureau, included $150-million to reimburse affected customers.
Capital One, which blamed the problem on vendors who did not adhere to its sales scripts, agreed to stop marketing the extra products until it implements a new plan.
Shares of Capital One, which has a market value of $32.4-billion, have risen 32 per cent this year.
They closed at $54.89 on Wednesday on the New York Stock Exchange.