Capital One Financial Corp, the largest independent U.S. credit card issuer, lowered its full-year profit forecast by 21 percent on Thursday, citing mounting consumer loan losses in a weakening economy and higher legal reserves.
Shares of Capital One fell to their lowest level in nearly five years.
The McLean, Virginia-based credit card and banking company now expects 2007 profit of $3.97 per share, down from its prior forecast of about $5.00. It was the third time in nine months that Capital One reduced its forecast.
Capital One also expects fourth-quarter profit per share of 60 cents, and 85 cents excluding a charge tied to GreenPoint Mortgage, a unit it closed in August. Net income was $390.7 million, or $1.14 per share, in the fourth quarter of 2006.
Analysts, on average, expected profit per share of $1.51 for the fourth quarter and $4.98 for the year, according to Reuters Estimates.
“It largely reflects what’s happening in the economy,” said Curt Beaudouin, senior analyst at Moody’s Investors Service, in an interview. “There has been a gradual increase in bankruptcy filings, and knock-on effects on credit card asset quality from particularly troubled housing markets.”
The housing slump, high oil prices, tighter credit and rising unemployment are making it harder for consumers to pay their bills. Analysts expect most major U.S. financial companies to post lower profits, or losses, when they report fourth-quarter results this month.
Capital One set aside $1.9 billion for bad loans in the fourth quarter, citing higher losses on U.S. credit card and auto loans, and deterioration in $700 million of home equity lines of credit from GreenPoint that it still owns.
The company boosted its forecast for full-year charge-offs to $5.9 billion from a range of $4.9 billion to $5.5 billion.
It is also taking $140 million of charges for litigation involving the Visa credit card network, to which it belongs.
Shares of Capital One fell Thursday. They earlier fell to $38.92, their lowest level since April 2003.
Shares of American Express Co, another card issuer and member of the Dow Jones industrial average, also fell Thursday.
Some of the latest losses stemmed from Capital One’s decision to diversify into retail banking.
Capital One acquired GreenPoint as part of its $13.2 billion purchase of Melville, New York’s North Fork Bancorp Inc in December 2006. Earlier that year, Capital One spent about $4.9 billion to buy Hibernia Corp of New Orleans.
GreenPoint had specialized in “Alt-A” home loans, which fall between prime and subprime in quality.
In regulatory filings, Capital One said the rate of loans at least 30 days past due rose to 3.87 percent in December from 3.68 percent in November. U.S. credit card charge-offs rose to 5.74 percent from 5.34 percent.
The Visa charge includes $80 million for Capital One’s share of Visa Inc’s $2.1 billion antitrust settlement with American Express, and $60 million for other cases.
Despite the loan losses, Capital One said it ended 2007 with more than $29 billion of liquidity, and expects to keep paying out 25 percent of profit as dividends to shareholders. It also expects to create a new stock buyback program in 2008.
“Capital One has historically had a relatively higher percentage of what the market considers subprime loans in its portfolio,” Beaudouin said. “But it prices for this risk, which helps maintain profitability.”
Moody’s and rival Standard & Poor’s affirmed Capital One’s medium investment-grade ratings, with a “stable” outlook. Capital One expects to report quarterly results on January 23.