Capital One's 1Q profit up on ING Direct purchase

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By ALEX VEIGA, Associated Press

LOS ANGELES (AP) — Capital One Financial Corp. said Thursday that its profit jumped 37 percent in the first quarter, buoyed by the company's acquisition of online bank ING Direct and higher revenue.

A healthier job market and warmer weather encouraged more Americans to shop in the first quarter, although the rate of increase last month was below February's. Rising consumer spending can help boost credit card use, benefiting card issuers like Capital One.

For the first three months of the year, Capital One reported that its net income grew to $1.4 billion, or $2.72 a share. That compares with net income of $1.02 billion, or $2.21 a share, in the same period last year.

Excluding the impact of the ING Direct purchase, Capital One earned $809 million, or $1.56 a share, in the latest quarter.

Total revenue climbed to $4.9 billion from $4.1 billion a year earlier.

Analysts polled by FactSet expected, on average, a profit of $1.38 a share on revenue of $4.32 billion.

Shares ended regular trading down 33 cents to $53.93 on Thursday. The stock added 57 cents, or 1 percent, to $54.50 in extended trading after the earnings report was released.

Capital One, based in McLean, Va., struck a deal to acquire ING Direct last year for $8.96 billion. The deal, which closed in February, made Capital One the nation's sixth-biggest bank, based on deposits, and was part of a strategy by the credit card issuer to boost its profile as a national bank.

Capital One reached a deal to buy HSBC's U.S. card business last year for $2.6 billion. That transaction is expected to close by the second quarter.

The addition of some $84.4 billion in deposits via the ING deal helped boost Capital One's deposits during the quarter to $216.5 billion, up from $125.4 billion in the prior-year quarter.

The company's net interest income, or money earned from loans, grew to $3.41 billion from $3.14 billion a year earlier. Non-interest income, which includes service charges and other customer-related fees, rose to $1.52 billion from $942 million.

Capital One saw its marketing expenses increase during the quarter to $321 million from $276 million.

U.S. consumers dusted off their credit cards in November, as they geared up for holiday-related shopping. Credit use rose nationally in January, but fell sharply in February.

Capital One said its domestic card business improved versus a year earlier. Loans grew about 5 percent and purchase volumes rose about 15 percent. The segment's loans declined about 6 percent compared to the fourth quarter, as cardholders paid down balances.

That sequential drop was more than offset, however, by growth in company's commercial lending and auto loan businesses.

Meanwhile, the rate at which Capital One wrote off credit card balances as unpaid declined to 2.04, down from 3.66 percent in the same quarter last year.

Capital One said its revenue margin declined in the quarter, as the company set aside $75 million for expected customer refunds stemming from instances when its staff veered from the company's scripts and sales policy when pitching products to its credit card customers.

On a conference call with Wall Street analysts, Chairman and CEO Richard Fairbank said he expects the acquisition of HSBC's U.S. card business will have a significant impact on Capital One's domestic card results the rest of this year — not all of it positive.

For example, as a result of taking on HSBC's card portfolio, the company anticipates it will write off more credit card loans as unpaid in the fourth quarter. And it predicts that revenue margin for the domestic credit card segment will decline between 30 to 35 basis points on a quarterly basis following the completion of the HSBC acquisition. A basis point is equivalent to 0.01 percentage point.

Much of that decline is due to Capital One having to bring HSBC's customer practices in line with its own, Fairbank said.

Still, Capital One anticipates that the HSBC acquisition will eventually help lift its bottom line.

"Despite the noise associated with these short-term and medium-term impacts, we expect that the synergies and ongoing operations of the HSBC U.S. card business will drive a significant and sustainable increase in domestic card earnings," Fairbank said.

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