Capital One profit jumps 50 percent

Capital One Financial Corp said second-quarter profit jumped 50 percent as fewer customers defaulted on credit cards, a sign that consumer loans may be a bright spot for other major banks. Over the next 10 days, most of the top US banks are due to report quarterly results, starting with J.P. Morgan Chase & Co on Thursday.
Capital One, a bank whose results are closely linked to credit cards, earned $911 million, or $1.97 per share, in the second quarter, up from $608 million, or $1.33 per share, a year earlier. Analysts on average had expected $1.71 a share, according to Thomson Reuters I/B/E/S. Capital One also said on Wednesday that it would raise $2 billion through a stock offering. The issue will fund its previously announced acquisition of ING Groep NV's US online bank.
The bank's profit gains were driven primarily by writing off fewer bad loans and releasing funds previously set aside to cover bad loans. But revenue growth was tepid. The bank's net charge-off rate - the percentage of defaulted loans being written off - fell to 2.91 percent from 5.36 percent a year earlier, while revenue rose just 2.3 percent to $3.99 billion. Net interest income edged up to $3.14 billion from $3.1 billion.
Capital One's credit card charge-offs declined by nearly half, to 5.06 percent from 9.36 percent. The decline matched projections by industry analysts, who note most banks have weeded out their weakest credit card borrowers, nearly three years after the financial crisis peaked, and credit card defaults will continue to shrink.
In a May report, Moodys Corp analysts projected industrywide credit card charge-offs will decline to a two-decade low of 4 percent by the end of 2012. Banks are only now starting to ramp up credit card lending. That means that even if defaults rise, they will not likely rise until next year, since there is often a lag between when a credit card account is opened and when default occurs.
Overall, the amount McLean, Virginia-based Capital One set aside to cover problem loans fell to $343 million in the second quarter from $723 million a year earlier. Capital One said its $2 billion stock offering will be underwritten by Barclays Capital, Morgan Stanley, Bank of America Merrill Lynch and J.P. Morgan. The bank also entered into a forward sale agreement with Barclays Capital and Morgan Stanley. The agreement sells shares at the current stock price, but shares will not change hands until seven months after the date of the stock offering.
Chip MacDonald, a banking attorney with Jones Day, said the deal will allow the bank to show regulators reviewing the deal that Capital One has the capital to absorb ING's operations, without additional shareholder dilution months before the deal is completed.
In June, the bank announced plans to buy ING's US online bank for $9 billion in cash and stock. For Capital One, the deal is part of its push to further expand its banking operation. The company spent much of the past decade transforming itself from a specialty credit card lender that mainly funded itself in the bond market, into a bank that relies heavily on deposits.