Capital One Profit Rises as Credit-Card Rewards Drive Spending

Capital One Financial Corp. (COF), the lender that purchased ING Groep NV (INGA)’s online U.S. bank this year, reported a 37 percent increase in first-quarter profit as credit-card rewards programs fueled customer spending.

Net income rose 37 percent to $1.4 billion, or $2.72 a share, from $1.02 billion, or $2.21, a year earlier and included an accounting gain of $594 million tied to the purchase of ING Direct USA, Capital One said yesterday in a statement. Adjusted profit of $1.56 a share beat the $1.39 average estimate of 24 analysts surveyed by Bloomberg.

Chief Executive Officer Richard Fairbank, 61, has spent more than $28 billion on acquisitions since 2005 to expand beyond the firm’s core credit-card business. The deals have transformed the McLean, Virginia-based company into the sixth- biggest U.S. commercial bank by deposits, capped by this year’s purchase of ING Direct.

The lender is focused on integrating its acquisitions and “distributing capital to shareholders through a meaningful dividend and share buybacks, consistent with our long-standing commitment to maintaining a strong and resilient capital base,” Fairbank said in the statement. The company has distributed a 5- cent quarterly payout since February 2009.

Capital One advanced 1.1 percent to $54.50 in extended trading in New York yesterday after announcing the results. The shares had advanced 28 percent this year, compared with a 21 percent gain for the 24-company KBW Bank Index. (BKX)

Customer Refunds

The lender set aside $75 million in reserves to refund credit-card customers who bought products from telephone sales people who didn’t obey company policy over the past “couple of years,” Fairbank said in a conference call with analysts.

The refunds are for “instances in which phone sales people didn’t adhere to our scripts and sales policy when cross-selling products,” Fairbank said. The policies are “in place to ensure that our sales practices meet our standards and unfortunately this didn’t happen in some cases,” he said. “It’s very important that we make sure that all of our customers have bought the products in the context that we exactly intended.”

Fairbank, who said the lender will contact customers, didn’t elaborate about the products or practices. The agents were vendors and not bank employees, Tatiana Stead, a company spokeswoman, said in an e-mail after the conference call ended.

First quarter revenue rose 21 percent to $4.94 billion, including the accounting gain and $160 million from the sale of Visa Inc. stock and reserve adjustments, the company said.

HSBC Credit Cards

The purchase of ING Direct in February added $84.4 billion in deposits, Capital One said in a slide presentation. The company has said it expects to complete the acquisition of HSBC Holdings Plc (HSBA)’s U.S. credit-card portfolio this quarter after selling $1.26 billion in stock last month to help pay for it.

“Results were strong this quarter even outside of acquisitions, and we expect strong performance ahead as the company digests both ING/HSBC deals,” RBC Capital Markets analyst Jason Arnold wrote in a note to clients.

Noninterest expense climbed 16 percent to $2.5 billion from the first quarter of 2011 and fell 4.4 percent from the fourth quarter, according to the statement. Salaries and benefits rose 20 percent to $891 million and marketing costs increased 16 percent to $321 million.

Fairbank is seeking to control costs after fourth-quarter profit missed analysts’ estimates as noninterest expense rose 25 percent. Those results, announced Jan. 19, surprised investors and prompted at least six analysts to ask for clarity on the company’s expenses during a conference call.

Venture Card

The lender gave away 1 billion reward miles in 31 days after introducing a promotion in March for its Venture Card, which offered customers double miles for every dollar spent, up to 100,000, according to a statement. Credit-card rewards miles or points typically are worth about 1 cent each.

Julie Rakes, a Capital One spokeswoman, said in an e-mailed statement earlier this week that the lender has started cutting 500 assistant tellers and reorganized its retail bank, consolidating 14 regions into eight.

“As you can imagine, in this challenging economic environment, the bank requires a leaner and more efficient operating model,” Rakes said.

Capital One said in a regulatory filing last month that first-quarter profit from continuing operations would be at least $2.50 a share, including an accounting gain of $1.15 from the ING purchase.

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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