Capital One’s 4Q profit buoyed by strong credit quality

Capital One Financial is the latest credit card issuer to release reserves because its loans have performed better than expected during the pandemic.

A $593 million reserve release helped propel Capital One to net income of $2.6 billion during the fourth quarter, which was up from $1.2 billion in the same period a year earlier.

“Consumers are behaving cautiously, spending less, saving more and paying down debt,” Chairman and CEO Richard Fairbank said Tuesday during the company’s quarterly earnings call. “These behaviors have been amplified by the cumulative effect of unusually large government stimulus and widespread forbearance across the banking industry.”

Between Jan. 1 and Sept. 30 of last year, the McLean, Va.-based company built its loss allowances by $5.6 billion to gird against potential defaults tied to coronavirus pandemic. But Capital One’s net charge-off rate for the fourth quarter was 1.38%, down from 2.6% a year earlier. The percentage of loans that were at least 30 days past due also fell by more than a percentage point.

Similarly positive credit trends have buoyed the fourth-quarter results at other large card issuers, including JPMorgan Chase, Bank of America, Citigroup and Discover Financial Services.

At the $421.6 billion-asset Capital One, historically strong credit performance across lending categories helped offset declines in card loan volumes during the quarter.

While auto loan originations were down 2% from the fourth quarter of 2019, the net charge-off rate for car loans also plunged from 1.9% to just 0.5%. Capital One said that it expects the credit quality of its auto loans to weaken in the future, partly as a result of pandemic-era forbearance offers ending.

“Uncertainty about future credit trends remains high, especially in the context of an evolving pandemic that is difficult to predict,” Fairbank cautioned.

In the firm’s U.S. credit card business, the volume of loans held for investment at the end of the quarter was down 17% from a year earlier to $98.5 billion.

The company attributed the decline in part to reduced marketing spending. Capital One slashed its marketing expenditures early in the pandemic and has yet to return to its earlier spending level. Marketing expenses during the fourth quarter totaled $563 million, down from $710 million in the same period the year before.

John Hecht, an analyst at Jefferies, wrote in a research note Tuesday that he expects credit card loan growth will resume in the second half of 2021.


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