Dive Brief:

• Capital One’s second-quarter profit plummeted 57% year over year, to $597 million, the bank reported Tuesday. 
• The company set aside $826 million toward potential credit losses stemming from the end of its credit card partnership with retail giant Walmart, and saw a separate $27 million drop in domestic card net revenue related to the end of the relationship with the retailer.
• Capital One also wrote down $31 million in integration expenses during the quarter, related to the bank’s expected acquisition of Discover. Capital One CEO Richard Fairbank, on Tuesday’s call with analysts, expressed confidence that the $35.3 billion deal will be completed late this year or early next, pending regulatory approvals.

Dive Insight:

The earnings results came a day after a proposed class-action lawsuit was filed on behalf of two Capital One customers in Vermont and New Jersey. The plaintiffs are aiming to block Capital One’s proposed acquisition of Discover, on the grounds that the deal would jack up prices, stifle competition and violate antitrust law.

Discover’s existence, along with that of American Express, the plaintiffs argue, pressures leading credit card networks Visa and Mastercard to pay rewards to customers to stay competitive.

“This competitive force will greatly diminish” if the acquisition goes through, the plaintiffs argue.

Capital One has painted the deal as pro-competitive, asserting a combination with Discover would bring the kind of scale needed to compete with Visa and Mastercard. 

But attorneys have said the deal is certain to draw antitrust scrutiny, as it would create the largest credit card issuer in the U.S. and the sixth-largest bank by assets. Democratic lawmakers including Sen. Elizabeth Warren of Massachusetts and Rep. Maxine Waters of California have called on regulators to block the deal, making arguments similar to those in the lawsuit. 

Waters spoke Friday at an all-day public hearing on the Capital One-Discover deal, held by the Federal Reserve and Office of the Comptroller of the Currency. Community groups, business owners and individual cardholders expressed both support and criticism of the potential merger in dozens of public comments Friday. 

The Walmart break-up

When Walmart and Capital One announced the end of their credit card relationship in May, following a legal dispute, the two decided to “convert existing eligible Walmart Card customers to one of Capital One's flagship branded rewards products," a Capital One spokesperson told Reuters that month.

That means the card company retains ownership and servicing of the $8.5 billion loan portfolio. But because the terms of the deal had spelled out that the two parties would shoulder the impact of credit losses, the end of the Walmart partnership will increase charge-off rates for Capital One, Fairbank said Tuesday. 

Overall, the amount Capital One set aside for credit losses soared 57%, to $3.9 billion. Net charge-offs jumped 21%, to $2.6 billion.

Fairbank called the Walmart partnership “a very unique one.” 

The mega-retailer sued Capital One in 2023, seeking to break off its relationship over customer service issues. A judge ruled in March that Walmart could end the relationship early. 

Capital One has learned over time “how individual different partnerships are,” Fairbank told analysts during Tuesday’s call. “We’ve seen great ones; we’ve seen not so great ones.”

The loss share with Walmart was a positive, and Capital One now has to be mindful of carrying higher loss rates due to the relationship’s end, he noted. But the portfolio the lender inherited is now seasoned, and the rest Capital One originated itself, “so we know it well,” he said. 

In the partnership business, “where people get into trouble is feeling they’ve got to drive to a certain scale,” Fairbank said. “We’ve walked away from a lot of opportunities over the years where things were just too focused on the card partnership as sort of the means to drive profit for the partner, more so than a way to really build a franchise.” Additionally, a card company has to be willing to walk away when the price isn’t right, Fairbank added. 

“We’re still very much a believer in the card partnership business, but the key is we’re going to be selective,” he said.

Also among the losses Capital One disclosed Tuesday, the bank added $8 million to the special assessment it paid the Federal Deposit Insurance Corp., related to last year’s bank failures.