Signet Banking Corp.'s net income down 14% in 4th quarter

January 25, 1995|By David Conn | David Conn,Sun Staff Writer

Higher interest rates and expenses related to a planned spinoff of Signet Banking Corp.'s credit card division depressed fourth-quarter earnings at both the parent company and its subsidiary, Capital One Corp.

That spinoff will be completed Feb. 28, the Richmond, Va.-based company said yesterday, as Signet transfers its remaining 88.5 percent interest in Capital One to Signet's shareholders. Shareholders of record as of Feb. 10 will receive one share in Falls Church, Va.-based Capital One, among the nation's top 10 credit card issuers, for each Signet share. In November, Signet sold 11.5 percent of Capital One to the public, raising about $100 million.

dTC Not including the expenses of the spinoff, operating earnings at both

companies were higher in the fourth quarter and the full year.

For the three months that ended Dec. 31, Signet reported a 14 percent decline in net income of $42.9 million, or 73 cents a share, down from $49.9 million a year ago, or 87 cents a share. Those numbers included the contribution made by the 88.5 percent of Capital One that is still in the hands of Signet.

Excluding all one-time charges and Capital One's contribution, fourth-quarter operating earnings at Signet rose to $24 million, from about $9 million a year earlier, according to Wallace B. Millner III, Signet's chief financial officer.

Aside from the spinoff costs, "Rising interest rates and narrower margins contributed to the slower rate of revenue growth during the quarter," the company said.

Profits in 1995 will be driven by "continued work on expense reductions, and implementation of strategies all across the company, primarily driven by information-based strategies that we really learned from the card company over the last five years," said Robert M. Freeman, Signet's chairman and chief executive officer.

Capital One has become one of the fastest-growing credit card companies largely on the basis of its sophisticated database management techniques, which have allowed it to quickly target a nationwide audience of potentially lucrative customers.

Signet's stock fell 12.5 cents yesterday to close at $30.75 a share. "It's still a somewhat confused situation," said analyst David M. West, of Davenport & Co. in Richmond. "This quarter Capital One was partly a division and partly a stand-alone company."

Still, Signet's earnings were only a few pennies per share lower than Mr. West had anticipated. "The [net interest] margin declined more than I thought it would," he said, referring to the difference between the average interest rate paid to depositors and the rate earned from all lending activities. "But the growth was higher."

Signet, whose subsidiaries include Signet Bank/Maryland, has about 250 branches in Maryland, Virginia and the District of Columbia.

About 20 percent of its 7,300 employees work in Maryland.

At Capital One, earnings also fell in the fourth quarter, reflecting higher interest rates, increased loan losses and some costs related to the pending spinoff.

The company earned $26.5 million in the quarter, or 40 cents a share, down from $40.6 million, or 61 cents a share a year earlier. Capital One said its fourth-quarter earnings also were hurt by the planned separation from Signet because the credit card company faced higher interest rates just when it had to go in search of outside funding for its expansion.

"These higher funding costs, which are completely capped now in terms of any further interest rate exposure, leave us with an excessively high cost of funds into the second quarter of 1995," said Chief Executive Officer Richard D. Fairbank. From now on, Mr. Fairbank added, the company can hedge against the risk of higher rates in a way that was not possible when it was fully a part of Signet.

Despite the profit decline, Capital One continued to grow in 1994. The number of credit card accounts rose to 535,000, up from 390,000 in the third quarter. And credit card loans that Capital One manages shot up 59 percent, to $7.0 billion, at the end of 1994, compared with $4.4 billion a year ago.

Some analysts are cautious about major credit card companies because of their tactic of drawing in cardholders with low introductory "teaser" rates.

"As a result, investors are concerned that a meaningful number of consumers will constantly transfer balances once their teaser rates terminate," wrote Salomon Bros. analyst Thomas P.


At the same time, some investors are worried about a slowdown in the economy, which would cause more cardholders to default on their credit.

"We are growing at rates that ensure that we are maintaining the very high standards of credit quality that have been our hallmark up until this point," said Nigel Morris, Capital One's chief operating officer.

The company's shares closed at $15.625 a share yesterday, up 12.5 cents.

Mr. West of Davenport said he rates the stock of Signet and Capital One a buy.

"I think Signet and Capital One are going to stand out because they'll show continued improvement in earnings throughout the year," he said.

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