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NEW YORK (
Capital One(COF - Get Report) management dramatically shifted its tone last week, signaling a much more defensive posture in response to tougher capital rules and consumer protection laws for credit cards, according to Rafferty Capital Markets analyst Richard Bove.
Bove, who lowered his recommendation to "hold" from "buy" on Monday, pointed to recent remarks by Capital One CFO Steve Crawford at a conference hosted by Morgan Stanley.
Crawford said Capital One is "not at the front of the curve," with regard to addressing new Basel capital requirements, when compared to "larger money centers" -- a term used to refer to institutions such as
Citigroup(C - Get Report),
Bank of America(BAC) and
Wells Fargo(WFC). He then went on to discuss plans to allow the bank's mortgage portfolio to run off, as well as high cost deposits acquired from
ING and loans it acquired from
HSBC(HBC) aimed at low-income borrowers.
Crawford's comments were markedly different from ones made May 30 by CEO Richard Fairbank at a conference hosted by Sanford Bernstein, Bove argues.
At that conference, Fairbanks said "based on our current forecasts and subject to regulatory approval, we would expect to request share repurchases that would drive 2014 total payout ratio to a level well above current bank industry norms. And we've started discussions with our regulators to seek approval to begin share repurchases in 2013 with the capital freed up," by
a planned sale of a portfolio of Best Buy(BBY) credit card loans to Citigroup .
Bove believes Capital One is moving away from its previous emphasis on extending credit card loans to borrowers who tend to pay their bills late -- as opposed to on time or not at all. While Capital One had profited handsomely from such loans, new consumer protection rules and bank capital rules are making such loans less attractive, Bove says.
As a result, Capital One is "dramatically shrinking their balance sheet, and this is going to have a very negative impact on their ability to grow earnings," Bove says.
He added, "what we got last week was a picture of a company that's going through a period of transformation and generally stocks don't do well when companies are going through periods of transformation."
A call and an email message to a Capital One spokeswoman were not immediately returned.
Written by Dan Freed in New York.