Capital One's Discover acquisition drags as subprime credit losses climb

Capital One's net interest margin fell 12% year-over-year in Q1 2026, driven by rising credit losses in its subprime card portfolio. Net charge-off rates climbed to 6.2%, up from 4.8% in the prior quarter, with the steepest increases among borrowers holding FICO scores below 660. The deterioration follows Capital One's May 2025 acquisition of Discover Financial Services, a deal that has introduced unforeseen integration and credit quality challenges. While the merger was designed to expand Capital One's payment network and customer base, the combined subprime exposure is now pressuring profitability. Higher charge-offs directly erode net interest income, the core revenue stream for card lenders. The margin contraction signals that the cost of credit risk is outpacing revenue growth from the expanded portfolio. Capital One reported the decline in Q1 2026, marking the sharpest drop in margin performance since 2020. Investors are now pricing in sustained pressure as the company navigates the credit fallout from the Discover integration.