Credit cards are catching up to auto and commercial loans in terms of competitiveness and credit intensity, Capital One Financial Corp. executives said during the bank's earnings call Jan. 24.
The bank reported fourth-quarter 2016 net income available to common stockholders of $710 million, or $1.45 per share, compared to $848 million, or $1.58 per share, a year ago. Full-year 2016 net income available to common stockholders was $3.51 billion, or $6.89 per share, compared with 2015's $3.87 billion, or $7.07 per share.
Domestic credit cards remain an attractive opportunity for the bank, but Chairman, President and CEO Richard Fairbank said the market is moving to a more intense part of the cycle. He said competition for business across the industry remains high, but revolving credit is growing "meaningfully faster" than household income, at about 7% year over year. Subprime growth on a year-over-year basis is expanding even faster than prime, but Fairbank pointed out that it began growing much later and from a lower base.
"We believe the growth window of opportunity remains open, but it's clear that this opportunity won't last forever," he said.
For several quarters, Capital One's card business had been "the most benign" in terms of competitiveness and credit intensity when compared to auto and commercial lending. That is quickly changing. Consumers' willingness to take on more debt and competitors' willingness to supply it can impact both the volume and quality of new originations, as well as affect existing customers.
"I would say the card business has certainly, I think, caught up to the others. The others interestingly have had a little bit of almost the low, if you will, and in some stability there," one executive said. "It's still moving along toward the most intense part of the credit cycle, but I think card ... has caught up."
The bank also made a change as to when it accounts for auto bankruptcies, which contributed to an allowance build during the quarter of $62 million, or 8 cents a share. The change accelerates the charge-off timing for certain bankruptcy accounts, said CFO R. Scott Blackley. Beginning this year, within 60 days of the bank receiving a notification of a bankruptcy, it will charge down the associated loan to the collateral value, regardless of payments status. This change allows the bank to accelerate the timing of the charge-off and will increase recoveries over time, which should offset the change. He described the change as "an accounting shift" and not a reflection of what it sees in its business or future expectations. The bank is still working through some process changes; while it is unclear when the exact impact will appear in charge-offs, Blackley said he expects the impact to appear in the first half of 2017.
"In terms of why, this is something where I think our past practice has been pretty much where others have been in the industry. We're moving to a more conservative practice," he said. "I think that's really consistent with how regulators prefer banks like us to manage things."