Credit card giant Capital One
The second quarter brought a loss of $275.5 million, or $0.65 per share, compared to a profit of $1.21 per share last year. Just like rival American Express
Then CEO Richard Fairbank got on the horn and shut the optimism down. As Fairbank bluntly put it:
We expect further increases in U.S. card charge off rate through 2009 as the economy continues to weaken. It is likely that … our U.S. card charge off rate will increase at a faster pace than the broader economy as a result of the denominator effect and our implementation of OCC minimum payment requirements ... We expect monthly U.S. card charge off rates to cross 10% in the next couple of months.
Furthermore, Fairbank confirmed what I discussed last week: Any apparent strength in delinquencies was likely a seasonal blip rather than an inkling of recovery. "Mostly what the second quarter is about is really about seasonal benefits," he noted. This is a polite way of saying business is no better now than it was when things hit the fan earlier this year.
Which seems reasonable. As analyst Meredith Whitney put it earlier this year, a lot of banks rode the boom years throwing out consumer loans "underwritten with faulty assumptions … that means they have to keep boosting reserves, and their earnings power is diminished which means they are not growing capital and they can't make more loans."
For Capital One and other consumer-heavy banks like Bank of America
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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. American Express is a Motley Fool Inside Value recommendation. The Fool owns shares of American Express, and has a disclosure policy.