Capital One ‘Broadsided’ Investors With Surge in Costs, 42% Profit Decline

Capital One Financial Corp. (COF), the credit-card issuer seeking approval to purchase ING Groep NV’s U.S. online bank, was pressed by analysts on an increase in expenses after fourth-quarter profit missed estimates.

At least six analysts out of 11 asking questions on a conference call yesterday pushed for clarity on costs after the McLean, Virginia-based lender said noninterest expense rose 25 percent to $2.62 billion. Net income fell 42 percent to $407 million, and earnings from continuing operations were 89 cents a share, missing the $1.55 estimate of 28 analysts surveyed by Bloomberg.

“Communication is key in this business and if there are sizeable one-time factors coming through it would have been nice to discuss this in advance,” Jason Arnold, an RBC Capital Markets analyst with an “outperform” rating on the firm, said in a phone interview. “I think a lot of people felt broadsided.”

Capital One said some expenses were one-time costs as Chairman and Chief Executive Officer Richard Fairbank readies the firm to integrate acquisitions. The company spent more on marketing, salaries, infrastructure and technology systems. The firm expects to close the ING deal and the purchase of HSBC Holdings Plc’s U.S. credit-card portfolio this year.

“We’re going to be adding tens of millions of new customers, increasing our overall customer account base by more than a third,” Chief Financial Officer Gary Perlin said on the call. “Infrastructure that complex is something we would have been building over time. We’ve accelerated these efforts.”

Future Expenses

Quarterly operating expenses may stay in the $2 billion to $2.05 billion range, Perlin said. Capital One, which gets more than half its revenue from credit cards, boosted its workforce in 2011 as full-time equivalent employees climbed to 30,500 from 25,700 at the end of 2010.

Salaries and benefits rose to $817 million in the quarter from $657 million a year earlier, while marketing costs advanced to $420 million from $308 million. Expenses classified as “other” climbed to $936 million from $691 million.

“People are still struggling with the expenses, I think, at least based on the number of questions I’m getting,” Brian Foran, a Nomura Holdings Inc. analyst, said on the call. Foran rates Capital One a “buy” with a $58 price target.

Capital One fell as much as 5.8 percent in extended trading yesterday after the earnings announcement. The stock has gained about 3 percent in the past year, the second-best performer in the 24-company KBW Bank Index. (BKX)

‘Top-Five Bank’

“We’ve been investing to build an infrastructure that’s commensurate with the size and complexity and the growth of a top-five bank we’ll soon become,” Fairbank said on the call. Tatiana Stead, a Capital One spokeswoman, declined to comment.

Fairbank, 61, is seeking Federal Reserve approval for the ING purchase, which would add more than 7 million customers and $80 billion in deposits. The Fed held three hearings to allow public input on the acquisition amid opposition from groups that advocate for consumer rights and affordable housing.

Capital One agreed in August to buy the HSBC portfolio. The transaction is set to be completed in the second quarter.

“If you would look at any bank that is growing in the way that we are, Rich described it kind of going from top-10 to top- five, you know the bar is being raised in terms of expectations on the controls and the management and regulatory interactions that take place,” Perlin said.

The bank may benefit as more consumers rely on credit to sustain spending. Consumer borrowing in the U.S. surged in November by $20.4 billion, the biggest jump since November 2001, to $2.48 trillion, the Fed said Jan. 9. Revolving debt, which includes credit cards, climbed by $5.6 billion, the biggest advance since March 2008, according to the Fed’s data.

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

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

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