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Spending, Charge-Offs Lead to Mixed Picture for Capital One, Discover Financial

A Capital One bank branch in New York in 2015.

Credit-card issuers Discover Financial Services DFS 0.82% and Capital One Financial Corp. COF -0.22% reported Tuesday that rising interest rates helped results in the third quarter as consumers took on more debt.

The rising rates collected by the lenders helped to offset the year-over-year increases in charge-offs at both companies as well as the growing amounts they are setting aside to cover for future loan losses.

Capital One’s profit for the third quarter increased 10% to $1.11 billion, or $2.14 a share, from $1.01 billion, or $1.90 a share, in the year-ago period. Profit beat analyst estimates, while earnings per share came just shy of analysts’ estimates of $2.15.

When adjusted to exclude certain items, including restructuring charges related to “realignment” of its workforce and the closing on its purchase of the Cabela’s credit-card portfolio, Capital One said it reported earnings of $2.42 a share. Revenue came in at $6.99 billion, up 8% from a year prior, beating analysts’ estimates.

Capital One shares rose about 2% in after-hours trading Tuesday, while Discover’s shares were inactive.

Discover’s profit for the quarter totaled $602 million, down 6% from year prior, or $1.59 a share, compared with $1.56 a year prior. Both figures beat estimates as did revenue that came in at $2.53 billion, up 10% from a year prior.

Net charge-off rates, which measure loan losses, largely improved for both companies from the prior quarter but worsened from the year-ago period. The third quarter is often when credit-card charge-offs are the lowest for lenders. Both Capital One and Discover loan performance figures are generally indicators of consumers’ ability to pay back their debts in part because they lend to a range of borrowers and aren’t largely focused on the affluent.

At Discover, the credit-card net charge-off rate totaled 2.80% in the third quarter, up 0.63 percentage point from year prior. The company increased provisions for loan losses by 51% from a year prior to $674 million, suggesting it expects losses to grow. Discover’s earnings press release said charge-off rates increased in part because of an oversupply of credit that is available to consumers.

At Capital One, domestic credit-card net charge-off rate increased 0.90 percentage point year-over-year to 4.64% and provisions for overall credit losses rose 15% to $1.83 billion.

Lending standards are tightening, with some lenders lowering spending limits. David Nelms, Discover’s chief executive, said on the earnings call that the company over the past year lowered spending limits in “some segments of the credit card portfolio.”

Discover is also pulling back on certain segments of the personal loan market. Mr. Nelms said the company has been taking “significant” action with its personal loans, where it has been “scaling back the volume of originations” with nonexisting customers. Problem spots included some borrowers who had personal loans from Discover and other lenders and had taken on more credit than they could handle. “There’s been a big increase in supply, and I think that maybe has caught up to some people because we’re having to make adjustments,” said Mr. Nelms in an interview after the earnings call.

Capital One’s chief executive Richard Fairbank said on his bank’s earnings call that he expects the Cabela’s acquisition will likely help to reduce the bank’s delinquency and charge-off rates going forward from what it would otherwise be. The Cabela’s portfolio, he said, has lower loss rates—a characteristic shared by several outdoor recreational goods retailers. Mr. Fairbank suggested the bank would be interested in other high-quality acquisitions. “I think over time, it is more likely that you’ll see Capital One in pursuit of higher-end opportunities than lower-end opportunities,” he said.


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