FDIC Says Capital One-Discover Deal Dented Bank Profits

The merger between Capital One and Discover Financial put a dent in bank profits.

Second-quarter data released Tuesday (Aug. 26) by the Federal Deposit Insurance Corp. showed $69.9 billion in profits for the banking sector, down 1% from the previous quarter.

“The increase in provision expense was largely attributable to Capital One’s acquisition of Discover Financial Services, as accounting standards require the acquiring institution to recognize a provision expense related to certain acquired assets,” the regulator said in its quarterly banking profile. “Absent this large provision expense, net income would have increased due to higher net interest and noninterest income.”

The $35 billion merger, which concluded in May, was the chief driver of a 33.7% increase in provision expenses for the quarter, which climbed to $7.6 billion, per the profile. Bank profits fell $677.3 million for the quarter.

During a second-quarter earnings call last month, Capital One CEO Richard Fairbank said the company is “fully mobilized and hard at work” on its integration with Discover, “which is going well.”

“We’ve been on a quest to build … an integrated banking and global payments platform that’s positioned at the forefront of the opportunities that will come as technology and data transform financial services,” he said.

The FDIC data also showed domestic deposits increasing for the fourth quarter in a row, with loan growth accelerating.

“Asset quality metrics remained generally favorable despite continued weakness in certain portfolios, which we are monitoring closely,” the FDIC said in the profile.

Those portfolios include credit cards, where net charge-off rates continue to exceed pre-pandemic levels, per the profile.

Capital One said net charge-offs were 5.3% in the second quarter, down from nearly 6% a year ago. Discover’s net charge-offs were 4.5% in June.

It was reported in June that Capital One is hoping its Discover acquisition will supercharge its banking and card business.

The Discover network could allow Capital One to make more money from debit card payments than competitors that are not both a card issuer and network; use the incremental interchange revenue to boost its bottom line or fund debit card rewards to attract new customers; and fund more investment and enhance rewards and deals to keep expanding its credit business.