Capital One Posts Loss, Says Worse Is Still Ahead

By MATTHIAS RIEKER Credit-card issuer Capital One Financial Corp. wrote off an additional $1 billion for bad loans and posted a worse-than-expected loss in the fourth quarter due to a rising default rate. The bank expects losses to worsen this year based on its expectation that the unemployment rate will hit 8.7% and home prices will fall another 10%. The results reinforced the gloom in the credit-card business, where losses are expected to be among the worst ever. J.P. Morgan Chase & Co. said last week it expects credit-card losses this year to worsen more than previously expected. It could mean big losses for other credit-card issuers, most notably American Express Co., which expanded its credit-card lending business in the past few years. "Credit was absolutely the big driver of the quarter," Capital One Chief Financial Officer Gary Perlin said in an interview. He said the bank has the capital to handle the losses. Capital One lost $1.42 billion, or $3.74 a share, in the fourth quarter ended Dec. 31, compared with a profit of $226.6 million, or 60 cents a share, in the year-earlier period. Analysts had estimated a profit of 33 cents a share. Capital One reported after the close of regular trading. In 4 p.m. New York Stock Exchange composite trading, its shares fell 4.4%, or $1.02, to $21.94. After hours, shares fell 8.1%, to $20.17. The bank said 7.08% of its credit-card and auto loans were in default, up from 5.85% in the third quarter. Mr. Perlin wouldn't predict how much that ratio would increase this year given Capital One's reluctance to expand such loans. The bank said it expects the ratio of loan losses to credit-card loans to edge up to 8.1% this quarter. The bank has continued to raise its estimates of losses. In the past three months, the bank's outlook for loan losses in 2009 has risen 20%. But Mr. Perlin said he was surprised by the deterioration in the economy following events in September. In addition to the costs of souring loans, an $811 million goodwill impairment charge hurt Capital One's fourth-quarter results. The company wrote down the value of its auto-lending business, which it had shrunk in recent quarters. The impairment charge implies that Capital One has no plans to expand that business any time soon. Capital One expects the unemployment rate to rise to 8.7% over the next 12 months, up from the previous expectation of 7%. Moreover, it expects real-estate prices to decline another 10%. "The really big risk to our [current] outlook isn't 2009, but it is what 2010 might look like," Mr. Perlin said.