Fragile Capital One Sees Future in Plastic

Capital One (COF) is boosting its issuance of credit cards to offset weakness in the rest of its business and to gird for a new law that could crimp earnings.

The financial company's volume of direct mail card solicitations shot up 212 percent in the fourth quarter, according to marketing research firm Mintel International. Although Cap One sent out more offers in total in Q4 2009, the latest hike represents the first time in a year that the company is actively chasing potential new card customers.

Several factors are at work here. First, delinquency rates for large card issuers are slowing. We haven't hit bottom in that respect -- Cap One predicts that credit-card chargeoffs will peak in the first quarter. But financial companies are at least beginning to think about bringing new business in the door.

Industrywide, direct mail card pitches rose 47 percent in the fourth quarter. JPMorgan Chase (JPM) increased its volume of offers by 152 percent; U.S. Bancorp (USB), 93 percent; American Express (AMEX), 67 percent; Discover (DFS), 36 percent; and Citigroup (C), 29 percent.

Second, such financial firms need to grow their credit card portfolios to make up for an expected decline in card revenues. The Credit Card Accountability Responsibility and Disclosure Act, portions of which take effect on Feb. 22, bars card issuers from jacking up interest rates and fees at will, as they've done in the past.

Unless banks can find their way around the rules (and that's not impossible), the new law will dent earnings. The solution? Issue more plastic. That's also an opportunity to stick consumers with higher-interest rate cards bearing annual fees. More than a third of card offers mailed out last year featured an annual fee, up from 20 percent in 2008. The average APR for variable-rate card offers in the last quarter was nearly 14 percent, compared with 11.8 percent in the year-ago period.

Cap One's move to boost its credit card issuance also reflects its own difficulties. Although the company recorded a profit in the fourth quarter, revenue was down sequentially. The sales outlook for the rest of 2010 also looks cloudy, as Cap One's consumer and commercial banking operations continue to suffer from deteriorating loans.

By contrast, the company's credit-card business shows "the greatest profitability" within Cap One, Chief Financial Officer Gary Perlin said today in a Web presentation at the Morgan Stanley Financial Services Conference. He also highlighted the unit's stable revenue margins (click on chart to expand).

Getting more credit cards in customers hands is, of course, risky, while also raising marketing costs. And these days it's just not that easy to get folks to sign on the dotted line, as they continue to dig themselves out of debt. Said Cap One CEO Richard Fairbank in a Jan. 21 analyst call to discuss the company's fourth-quarter performance:

"The lack of credit demand is a striking thing across all of our businesses, but we certainly see it in the card business. And while I think that is particularly acute during this downturn, our expectation is that probably causes the card business to not have much growth and probably more likely to be something with respect to shrinking."