Capital One 1Q profit jumps 60 percent

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Posted: Apr 21, 2011 12:02 PM
Capital One 1Q profit jumps 60 percent

Capital One Financial Corp. said Thursday its first-quarter net income soared by 60 percent thanks to improvement in its credit card business.

"We are gaining momentum across our businesses, and the period of shrinking loans through the Great Recession came to an end in the first quarter," said Richard D. Fairbank, Capital One's chairman and chief executive.

The McLean, Va., financial services company reported net income rose to $1.02 billion, or $2.21 per share, in the period ended in March, from $636 million, or $1.40 per share, a year ago.

Analysts expected earnings per share of $1.48, on average, according to a survey by FactSet.

Capital One set aside $534 million to cover defaulting loans, roughly a third of last year's provision of $1.48 billion.

That was possible because the amount of balances the bank has had to write off as uncollectible fell sharply during the year. Net charge-offs, as they are referred to in the industry, fell 18 percent to $1.15 billion in the first quarter from $1.39 billion in the 2010 period. As a percentage of outstanding balances, defaults in the first quarter dropped to 6.13 percent from 10.29 percent last year.

Equally as important, payments late by 30 days or more, known as delinquency, dropped to 3.88 percent in the quarter, from 5.43 percent last year. That's an indicator that charge-offs will continue to fall in coming months, because banks write off accounts after they become 180 days late, and it allows the bank to reduce its loan-loss provision.

Charge-offs, consumer debt reduction and tighter lending standards have also reduced the balances carried on U.S. cards by about 10 percent in the past year, to $50.6 billion, reducing Capital One's risk.

But during a conference call to discuss the results, Chairman and CEO Richard D. Fairbank said that while customers are paying down their balances, they are also using their cards more. Purchase volume rose 14 percent during the quarter. The bank also opened more new accounts in March than it had since November 2007, right before the recession began. New account originations in the quarter were double the 2010 quarter, he said.

Fairbank said charge-offs and delinquency rates also improved in the bank's home and auto lending businesses. "We're gaining traction all across our company," he said.

Net interest income, the money earned from deposits and loans, including credit cards, fell 3 percent to $3.14 billion from $3.23 billion last year. Non-interest income, or money earned from fees and charges, slid 11 percent to $942 million from $1.06 billion. Both metrics improved from the fourth quarter.

Marketing expenses during the quarter jumped 53 percent to $276 million. Capital One is known for its ubiquitous "What's in Your Wallet?" advertising campaign. During the call, Fairbank said the company did not scale back marketing as much as it typically does during the first quarter, because "we see good opportunities out there." The bank has switched focus to attracting customers who will use their cards more responsibly, rather than on luring people with high debt loads to transfer balances, he said. "In almost every case that tends to take us toward the higher cost to acquire relative to some of our historical norms, and that's very advertising and marketing-sensitive," the CEO said. "So I think you should expect that our investment in marketing will continue to be pretty robust."

Shares of Capital One added $2.56, or 4.9 percent, to $52.99 in midday trading after earlier hitting a 52-week high of $53.67 on heavy trading volume.

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AP Business Writer Dorothea Degen contributed to this report.