Bloomberg News

Capital One Shares Rise as Earnings Beat Analysts’ Estimates

October 21, 2011

(Updates share price in second paragraph.)

Oct. 21 (Bloomberg) -- Capital One Financial Corp., the credit-card issuer seeking approval to purchase ING Groep NV’s U.S. online bank, rose the most among financial stocks in New York trading after announcing a 1.3 percent profit gain.

Shares of the company climbed $2.80, or 6.9 percent, to $43.29 at 4:15 p.m. in New York Stock Exchange composite trading. The increase was the biggest among the 81 firms in the Standard & Poor’s 500 Financials Index, which advanced 2.4 percent.

Capital One, led by Chief Executive Officer Richard Fairbank, yesterday reported third-quarter net income of $813 million, or $1.77 a share, compared with $803 million, or $1.76, in the same period a year earlier. Earnings from continuing operations at the McLean, Virginia-based company were $1.88 a share, beating the $1.68 estimate of 28 analysts surveyed by Bloomberg. Lending increased and fewer borrowers defaulted.

“We believe the period of shrinking loans through the great recession has come to an end,” Fairbank said on a conference call with analysts yesterday after the close on the NYSE, when results were announced. Total loans increased $987 million to $130 billion, driven by growth in auto and commercial banking.

Hiring Workers

Capital One, which gets more than half its revenue from credit cards, aims to expand through acquisitions and is hiring workers as other U.S. lenders retrench. Fairbank, 61, is seeking Federal Reserve approval for the ING purchase, which would add more than 7 million customers and $80 billion in deposits. In addition to ING, Capital One agreed earlier this year to purchase HSBC Holdings Plc’s U.S. credit-card portfolio.

“We expect that credit and revenue trends will remain in recovery mode and that the two previously announced acquisitions will be substantially accretive in 2012,” Chris Kotowski, an Oppenheimer & Co. analyst in New York, wrote in an Oct. 9 note to clients.

The Fed held three hearings to allow public input on the ING acquisition and extended the comment period until Oct. 12 amid opposition to the purchase from groups that advocate for consumer rights and affordable housing, including the National Community Reinvestment Coalition. The deal is scheduled to be completed later this year or in early 2012. The HSBC transaction is set to close in the second quarter of 2012.

Net Interest Margin

Revenue climbed 4 percent from the second quarter to $4.15 billion. Net interest margin, the difference between what banks pay to borrow money and what they get for loans and on securities, expanded to 7.39 percent in the third quarter from 7.2 percent in the preceding three-month period.

Provisions for loan and lease losses rose to $622 million from $343 million, the first increase since last year’s third quarter, while net write-offs fell 13 percent to $812 million from $931 million in the second quarter.

Credit-card write-offs dropped to 4.23 percent from 5.06 percent in the prior three-month period, while the defaults on auto loans climbed to 1.69 percent from 1.11 percent.

The lender also reported a $266 million loss tied to derivatives with a notional amount of $23.8 billion intended to reduce the amount of capital needed for the ING deal if interest rates rise. The loss was mitigated by a $239 million gain on the sale of $6.4 billion in mostly agency mortgage-backed securities, the company said.

1,000 Branches

Capital One, which employed 27,800 people at the end of 2010, plans to end 2011 with at least 3,600 more workers, Tatiana Stead, a spokeswoman, said last month. The company is hiring bankers, financial analysts and call-center employees, among others, she said. The firm has about 1,000 branches in New York, New Jersey, Connecticut, Delaware, Virginia, Maryland, Texas, Louisiana and Washington, D.C.

Write-offs for credit-card loans that Capital One deemed uncollectible fell to 3.9 percent last month, from 4.1 percent in August and 8.38 percent in September 2010, according to company filings with the Securities and Exchange Commission.

Stagnating economic growth and slumping wages may begin to reverse those declines. Loans at least 30 days overdue, a signal of future write-offs, climbed to 3.65 percent in September, the fourth consecutive monthly increase. That’s the second-highest delinquency rate among the six-biggest U.S. credit-card issuers after Charlotte, North Carolina-based Bank of America Corp. Lenders typically write-off soured card loans after 180 days.

Poverty Rate

Take-home pay in the U.S., adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years, the Commerce Department reported last month. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1 percent, a 17-year high.

American Express Co., the biggest credit-card issuer by purchases, posted a third-quarter profit of $1.24 billion, beating analysts’ estimates, as customer spending climbed and fewer borrowers defaulted. U.S. card income rose 23 percent year-over-year to $733 million, while international card income climbed 53 percent to $221 million, AmEx said Oct. 19.

--With assistance from Donal Griffin in New York. Editors: Steve Dickson, William Ahearn

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.


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