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Capital One Profit Beats Estimates as Card Spending Climbs 12%

Capital One Financial Corp. (COF), the lender that gets more than half its revenue from credit cards, posted a second-quarter profit that beat analysts’ estimates as a boost in U.S. consumer confidence helped fuel spending.

Net income surged to $1.12 billion, or $1.87 a share, from $93 million, or 16 cents, a year earlier, the McLean, Virginia-based company said yesterday in a statement. Profit from continuing operations, which excludes some items, was $2.07 a share, beating the $1.73 average estimate of 28 analysts surveyed by Bloomberg.

Chief Executive Officer Richard Fairbank has spent more than $28 billion on acquisitions since 2005, making Capital One the eighth-biggest U.S. commercial bank at the end of last year. The firm has sought to return more capital to shareholders, announcing this month that it will repurchase as much as $1 billion of stock after completing the sale of a Best Buy Co. credit-card portfolio.

“They’ve become a more mature and slow-growth company, and management has realized that,” Scott Valentin, an analyst at FBR Capital Markets in Arlington, Virginia, said in an interview before results were announced. “That’s sparked the discussion about returning more capital.”

The lender acquired the Best Buy assets, comprising private label and co-branded credit cards, from HSBC Holdings Plc last year as part of a deal that added about $30 billion in assets. Capital One also picked up more than $80 billion in deposits last year with the purchase of ING Groep NV’s U.S. online bank.

Consumer Sentiment

Capital One shares rose 2.3 percent to $68.60 in extended trading yesterday. The stock climbed 16 percent this year through the close of regular trading, trailing the 28 percent advance for the 24-company KBW Bank Index.

Net revenue climbed 12 percent to $5.64 billion, beating the $5.52 billion average estimate of analysts in the Bloomberg survey. Net interest margin, the difference between what banks pay depositors and what’s earned on loans, widened by 0.12 percentage point from the first quarter to 6.83 percent.

The results included a $119 million loss from discontinued operations that was driven by a $183 million addition to reserves to cover the repurchase of faulty mortgages.

Consumer sentiment improved last month as Americans grew more upbeat about the economy. The Thomson Reuters/University of Michigan index of confidence rose to 84.1 in June from 78.6 at the end of March.

Credit Losses

Credit-card write-offs averaged 4.28 percent for Capital One in the second quarter, according to data compiled by Bloomberg. Loans at least 30 days overdue, a signal of future defaults, averaged 3.05 percent, the data show. Both figures were the highest among the six biggest U.S. issuers.

Capital One has sought to cut credit losses by shifting its marketing to attract affluent customers who spend more and pay their balances in full each month. The company employs actor Alec Baldwin to promote its Venture card and comic Jimmy Fallon to publicize its cash rewards card. Both cards are geared toward wealthier consumers, Valentin said.

“We will continue to tightly manage costs and credit quality, drive resilient growth in businesses we are emphasizing, and focus on returning capital to our investors to deliver sustained shareholder value,” Fairbank, 62, said in the statement.

Card purchases rose 12 percent to $50.8 billion from a year earlier, according to the statement. U.S. card balances were $70.5 billion at the end of June, little changed from March. Auto loans advanced 5.1 percent to $29.4 billion from the first quarter.

Manhattan Skyscraper

The lender is in talks to take about 250,000 square feet of offices at 299 Park Ave., a 1.2 million-square-foot Manhattan skyscraper on the market for sublease by UBS AG, two people with knowledge of the negotiations said earlier this week. A deal would place the bank in the heart of Midtown’s financial corridor, diagonally across from JPMorgan Chase & Co. headquarters.

Consumer spending in the U.S., where 93 percent of Capital One card purchases are made, climbed at a 1.5 percent annualized rate in the second quarter, according to Commerce Department figures disclosed this week.

American Express Co. (AXP), the biggest credit-card issuer by purchases, posted a record profit earlier this week as customer spending rose. Net income at the New York-based firm rose 4.9 percent to $1.41 billion. AmEx fell 3.6 percent yesterday on top of a 1.9 percent decline on July 17, the biggest two-day drop since November 2011, amid investor concern that a European Commission plan to cap card fees may crimp profit.

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

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Christine Harper at charper@bloomberg.net

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