MasterCard Profit Beats Estimates as Consumer Spending Rises

MasterCard Inc. (MA), the second-biggest U.S. payments network, posted a third-quarter profit that beat analysts’ estimates as U.S. consumer spending increased and the firm’s tax rate fell.

Net income climbed 7.7 percent to $772 million, or $6.17 a share, from $717 million, or $5.63, a year earlier, the Purchase, New York-based company said today in a statement. The average estimate of 35 analysts surveyed by Bloomberg was $5.92.

Consumer spending in the U.S., where MasterCard gets about 40 percent of its revenue, rose more than forecast last month, a sign that the biggest part of the economy was strengthening as the quarter ended. MasterCard, led by Chief Executive Officer Ajay Banga, also has been gaining share of the U.S. debit-card market after new federal rules on transaction processing helped erode the dominance of larger rival Visa Inc. (V)

“In the U.S., we saw an improvement in consumer confidence, which resulted in an increase in consumer-spending growth, although that growth is slower than 2011 or the numbers we saw in the first half of 2012,” Banga, 52, said in a conference call with analysts. “Housing-related categories of retail spending continue to perform well, which I think points to the underlying improvement in the housing market.”

MasterCard gained 1.8 percent to close at $460.93 in New York. The stock has advanced 24 percent this year, outpacing a 12 percent gain for the 70-company Standard & Poor’s 500 Information Technology Index. (S5INFT)

Operating Expenses

Net revenue increased 6 percent to $1.92 billion, short of the $1.94 billion average estimate in the Bloomberg survey. Operating expenses rose 5 percent to $854 million.

Global spending on MasterCard and Maestro cards, adjusted for currency fluctuations, climbed 12 percent to $676 billion, the company said. Processed transactions rose 24 percent to 8.7 billion.

Credit-card purchases rose 3.2 percent in the U.S. and 11 percent worldwide, while debit-card spending surged 13 percent in the U.S. and 15 percent globally, the company said.

The effective tax rate fell to 27.6 percent from 30.5 percent a year earlier due to “export incentives” tied to software that helps MasterCard authorize payments, the firm said. The firm benefited from a U.S. law that allows income from exported software to be taxed at a lower rate, according to James Issokson, a company spokesman.

Analysts including Tien-tsin Huang of JPMorgan Chase & Co. (JPM) and Robert W. Baird & Co.’s David Koning questioned the quality of MasterCard’s results, saying the company beat estimates because of the tax-rate change.

Photographer: Andrew Harrer/Bloomberg

MasterCard Inc. Chief Executive Officer Ajay Banga said in the statement, “MasterCard continues to drive solid financial performance and focus on executing key deals, investments and partnerships.” Close

MasterCard Inc. Chief Executive Officer Ajay Banga said in the statement, “MasterCard... Read More

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Photographer: Andrew Harrer/Bloomberg

MasterCard Inc. Chief Executive Officer Ajay Banga said in the statement, “MasterCard continues to drive solid financial performance and focus on executing key deals, investments and partnerships.”

Share Repurchases

“We actually looked very critically in terms of how we do our calculations” for the tax benefit, MasterCard Chief Financial Officer Martina Hund-Mejean said in a phone interview. “We did not take advantage of this regulation as much as we should have.”

Rebates and incentives, which encourage banks to use MasterCard’s products, climbed 20 percent to $677 million from a year earlier, the company said in a presentation. That exceeded the estimate of Moshe Orenbuch, an analyst in New York with Credit Suisse Group AG (CSGN), who predicted $647 million.

Banga is repurchasing stock as MasterCard and Visa move closer to resolving a seven-year legal battle with merchants over credit-card “swipe” fees. MasterCard spent $216 million to buy 500,000 of its shares in the quarter, the firm said. It bought back an additional 255,000 shares this month through Oct. 25 for $119 million, and has $1.1 billion left to spend under a $1.5 billion repurchase program, according to the statement.

China UnionPay

The settlement of the proposed class-action lawsuit against banks, MasterCard and Visa probably is worthy of preliminary approval, U.S. District Judge John Gleeson in Brooklyn, New York, said last week. MasterCard has said the settlement could cost the company $790 million. Visa, based in Foster City, California, has said its share would be about $4.4 billion.

Visa, the world’s biggest payments network, is scheduled to report fiscal fourth-quarter results after U.S. markets close today.

MasterCard, ranked No. 2 globally by processed transactions, risks losing its standing as the second-biggest payments network in terms of total spending to Shanghai-based China UnionPay Data Co.

UnionPay’s share of combined credit- and debit-card purchase volume for the first half of 2012 rose to 25 percent from 21 percent a year earlier, while MasterCard’s climbed to 22 percent from 21 percent, according to the Nilson Report, a payments-industry newsletter. Visa’s share declined to 46 percent from 49 percent, while fourth-ranked American Express Co. (AXP)’s fell to 7.2 percent from 7.5 percent.

Visa, MasterCard and New York-based AmEx were among companies to win partial support this year from World Trade Organization judges in a U.S. claim that China unfairly discriminates against foreign suppliers of electronic-payment services by imposing requirements on them that aren’t applied to domestic firms.

To contact the reporter on this story: Donal Griffin in New York at dgriffin10@bloomberg.net

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

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