Big Five Report: Cap One Credit Cards Lead Company to Profit

Credit cards and its recent diversification strategy are helping Capital One Financial Corp. improve its profile on Wall Street. During its second quarter, the company`s revolving credit card balances increased by $200 million. The charge off rate for domestic credit cards dropped significantly to 4.74%, from 9.49% the previous year. In addition, the company`s loan loss reserves were down 52.6% to $343 million.

CARD Act

According to Brian Riley, research director with TowerGroup, “The CARD Act was a game-changer for Cap One because it hampered their ability to do risk-based pricing, which had always been a key to their profitability. Now they`re looking to private-label cards, developing a broader banking presence and changing their focus in credit card marketing.”

Expanding and Growing

Capital One has been on a diversification strategy over the past few years, especially since the CARD Act hit many credit card issuers and companies with new regulations and costs. Part of the diversification process was its acquisition of the Kohl’s Corp. private-label credit card operation.

As a result, credit card purchase volume rose 39.9% to $34.3 billion compared with $24.5 billion last year.

Loss-Sharing Agreement

Capital One has a loss-sharing agreement with Kohl’s. According to Capital One, this agreement has the net effect of lowering its charge-off rate. During the current quarter, Capital One had a charge off rate of only 4.74%, which is half of the 9.49% it was a year ago. Accounts that are at least 30 days overdue, which puts them in delinquency, also declined to 3.33% from the 4.79% rate it was last year.

According to Riley, “I predict we will begin to see some exciting things from Cap One as it combines online banking with debit cards. This is all part of (CEO Richard) Fairbank`s plan to be much less reliant on its traditional credit card marketing business.”

Kristie Lorette

Kristie Lorette is an award winning credit specialist and an MBA graduate of Nova Southeastern University. Her lengthy tenure includes service at Merrill Lynch where she oversaw a $300 million dollar portfolio and 16 branches. At Merrill Lynch, Kristie specialized in consumer issues related to credit and mortgages. As a writer and researcher in personal finance, Kristie is also a contributor to Yahoo! Shine, Quizzle.com, Moneysmartlife.com and many other online and print publications.