Capital One slashes forecast

By MSN Money staff with wire reports

You think you have credit card problems? Now your credit card company does, too.

Capital One (COF, news, msgs) Thursday warned that 2007 earnings would be $3.97 per share, a 20% decline from its previous forecast of $5.00 for the full year. Capital One also said it expects fourth-quarter earnings of 60 cents per share. The company earned $1.14 per share in the fourth quarter of 2006.

Shares of Capital One fell more than 10% right after the open but recovered to $42.92 at the close, a loss of 1%.

In after-hours trading, however, Capital One shares fell 2.1% to $42, in part because American Express (AXP, news, msgs) issued a similar warning after the close. American Express shares were down 7% in after-hours trading to $48.92.

Capital One said it was taking a $1.9 billion provision for losses on bad loans in the fourth quarter, with $1.3 billion in charge-offs -- bad-debt expenses that will be written off the company's balance sheet.

"It's another bank in the negative credit-market slipstream," Howard Wheeldon, senior strategist at BGC Partners in London, told Bloomberg News. "The outlook for bad loans remains grim."

More signs of trouble

The news from the McLean, Va., credit card company is the latest sign of turmoil in the nation's credit markets, and confirmed fears by some analysts that the collapse of the subprime mortgage market has hurt other credit classes.

The warning comes on the heels of Countrywide Financial's (CFC, news, msgs) disclosure Wednesday that the percentage of borrowers who missed payments on home loans last month rose. The nation's biggest mortgage lender said some 6.96% of the loans in its servicing portfolio were delinquent last month -- up from 5.02% in December 2006.

(News reports late Thursday suggested Countrywide may soon be taken over by Bank of America (BAC, news, msgs).)

• Talk back: Is this a correction or the start of a bear market?

The news also renewed jitters that slowing economic growth may hurt upcoming corporate earnings reports more than previously thought.

Legal liability?

In addition to the loan losses, Capital One said it had initiated a $60 million legal reserve for possible damages in pending litigation involving the Visa credit card network, of which Capital One is a member. The company previously said it was taking a fourth-quarter pre-tax charge of about $80 million for liabilities in connection with the antitrust settlement that Visa reached in November with American Express.

Some analysts remained optimistic. "Quite simply, we believe there is value in the franchise that will either be realized through better earnings and valuation improvement, or an acquisition," wrote Calyon Securities analyst Craig Maurer in a research note. "We do not expect this to occur over the next six months."

Capital One is scheduled to report fourth-quarter results Jan. 23.