Updated from 5:12 p.m. EST
Credit card company
reported a 64% gain in first-quarter profit on Monday, fueled by sharp gains in interest revenue from its customers.
The company, which has specialized in issuing cards to consumers with poor credit histories, earned $309 million, or $1.35 a share, compared with $188 million, or 83 cents a share, in the year-earlier period. The Thomson Financial/First Call consensus estimate for the company was for Capital One to earn $1.03 a share.
The company's total revenue in the quarter was $2 billion, compared with $1.8 billion a year ago. Capital One generated $734 million in net interest income, a 20% improvement over last year. Net interest income is the interest paid by Capital One cardholders each month.
In recent years, Capital One has become a major credit card lender, building its brand name through a big-budget television ad campaign and frequent direct mailings to potential customers. And that trend continued in the first quarter, with the card company spending $241.7 million on marketing and advertising, a 15% jump over the final quarter of 2002. But the card company still spent 31% less on advertising than the year-ago quarter.
The company, however, had more charge-offs for bad debts in the quarter compared with a year ago. In the just-completed quarter it charged off $461 million in bad debts, compared with $238 million a year ago.
But the company said it believes credit issues are improving at Capital One.
"We expect somewhat lower charge-offs in the second quarter and lower still in the second half of the year," said Capital One Chairman and CEO Richard Fairbank.
There's some reason to believe that may be true. The delinquency rate on credit card bills, something that had been rising all last year at Capital One, is finally ebbing. In the first quarter, the delinquency rate came in at 5.72%, down from 6.51% at the end of last year, although it's still higher than the 4.44% delinquency rate of a year ago.
Some believe the delinquency rate is more important than the dollar value of the bad debts charged off by a lender in a particular quarter because it's an indication of what lies ahead for a credit card company. The apparent improvement in credit quality at Capital One is in line with what a number of banks also have been reporting in their own lending portfolios.
All, however, wasn't good news for Capital One despite the earnings surprise. In the quarter, its managed loan balances declined by $533 million to $59.2 billion, and it had nearly 1 million fewer customer accounts. And the company said it expects "little to no growth in accounts'' this year.
Reilly Tierney, a financial services analyst with Fox-Pitt, Kelton, said Capital One showed surprising improvement on credit quality issues, but the drop in loan balances and accounts is disturbing.
For months now, Capital One has been a favorite target of short-sellers, who question the sustainability of the credit card company's fast-paced growth. The shorts -- traders who bet a stock will fall in price -- have charged that Capital One is less than conservative with its corporate books and the accounting treatments it uses.
And, up until now, Capital One has given the shorts a lot of ammunition.
Last July the Virginia-based lender entered into a "memorandum of understanding" with bank regulators, which requires Capital One to adjust the amount of money it sets aside to cover customer defaults. One way for lenders to juice earnings is to crimp a bit on the reserves they put aside for loan losses.
The deal with regulators, however, put a big crimp in Capital One's stock. The news cut the stock's price in half, and it has never fully recovered.
Then last month, Capital One sent investors running for the exits again, when it revealed that its chief financial officer, David Willey, had resigned amid allegations that he engaged in insider trading last spring. The
Securities and Exchange Commission
is investigating whether Willey improperly sold more than $3.2 million shares of Capital One stock around the time the company's talks with bank regulators were heating up.
Capital One kicks off a busy weak of earnings from credit card companies and other specialty lenders. Also on tap this week are earnings reports from