Capital One says the Discover deal's earnings power is visible now, but its sum is unfinished

Capital One bought Discover Financial to build a larger card lender that also owns a payments network, and since the deal closed its answer to what the combined bank will earn has been a forecast. In April it said it still expected that earnings power, once integration is done, to match its view when the deal was announced, measured as return on tangible common equity at the capital level in its deal model. With results for the September 2026 quarter, the chief executive, Richard Fairbank, changed the form of that answer: "You can squint your eyes and see it now in the first 3 quarters of 2026."

What he offered was a method rather than a figure. Take this year's results, remove the sizeable release of loan-loss reserves, and add the higher marketing the company expects in the fourth quarter. Then, looking further out, add the merger synergies still to come and subtract the interchange, the fee a card issuer earns on each purchase, likely to be lost under the revised Visa and Mastercard merchant settlement; management said those two roughly cancel each other. Asked by analysts what the pieces add up to, management said the earnings power was consistent with its original expectations and visible after a few approximate adjustments.

The first question is the starting point. Reported earnings per share rose from $3.34 in the first quarter to $5.61 last quarter. The company's adjusted figure, which removes integration costs and purchase-accounting amortisation tied to its acquisitions, sat $1.08 a share higher in each of the three quarters, calculated from the reported figures. Amortisation was the largest of last quarter's adjusting items, $483 million before tax. Which of the two lines the read-off starts from moves the answer by more than a dollar a share every quarter.

The second question is what drove the improvement, and last quarter's step up came mostly from the business itself. Revenue rose from the quarter before while non-interest expense fell, so pre-provision earnings, revenue minus operating costs before any charge for bad loans, rose 10%. The provision for credit losses barely moved, because lower charge-offs were offset by a much smaller reserve release: $225 million, against $662 million in the second quarter. The reserve release is on Mr Fairbank's list of things to strip out. The seasonal lift is not, though he called the third quarter seasonally strong in most years for both margins and charge-offs, and net interest margin widened last quarter.

The third question is cost. Marketing was $1.6 billion last quarter, 14% more than a year earlier, and management said it would lean harder into marketing in 2027, including restarting marketing for Discover cards. The method adds only the fourth quarter's rise. When an analyst asked whether expenses would step up further from here, Mr Fairbank replied that the company has the earnings power to sustain high levels of investment while still delivering strong earnings power, an answer about capacity rather than a figure for next year.

The settlement is harder still to size. The company said it thinks approval is likely and has built its best estimate into its plans, but sees wide error bars, with the court hearing on final approval due in November. The synergies on the other side of that offset can be roughly gauged: the company reports about $1.8 billion of annualised combined revenue and cost synergies achieved so far, against a target of $2.5 billion for the whole deal, which by our arithmetic leaves about $0.7 billion to come. Management put the settlement's impact in the same ballpark.

Underneath all of this sits the Discover card book, and it is still shrinking. Its loans were 1.2% smaller than a year earlier in the first quarter, 1.5% in the second and 2.9% last quarter. In July Mr Fairbank put the bottom of this brownout around the fourth quarter of this year; now he says: "We expect continued contraction over the next several quarters and then for loan growth to turn positive after that."

There are signs of a turn: management said new Discover originations rose from a year earlier last quarter. Management has also linked the strong credit of the past year to the same pullbacks that shrank the book, so part of the credit benefit and part of the growth drag come from one decision. The earnings Mr Fairbank asks holders to see today therefore rest partly on a loan book that has not yet stopped shrinking, and on a 2027 marketing step-up and a settlement cost that the company has described but not sized.