2nd UPDATE: Capital One 3rd-Quarter Net Up 44% on Acquisitions, Higher Revenue

--Company reserved less in the third quarter for HSBC loans than the prior quarter

--Net charge-off rate declined from a year earlier

--Company expects to meet proposed 8% capital ratio target under Basel III next year

(Updates with CEO comments about private-label credit-card business in paragraphs 13 and 14, details about average loan balances in paragraphs 15 and 16 and details about capital ratios in paragraphs 17 and 18.)

 
   By Nathalie Tadena and Andrew R. Johnson 
 

Capital One Financial Corp.'s (COF) third-quarter earnings jumped 44% as revenue strengthened thanks in part to two large acquisitions completed this year and lower expenses related to the deals.

Shares were up 3% at $59 after hours Thursday as results topped analyst expectations. Through the close of regular trading Thursday, the stock was up 35% since the start of the year.

Capital One, which transformed from a credit-card lender to a bank just before the 2008 financial crisis hit, has lately benefited along with many of its peers from improving credit quality.

The McLean, Va.-based lender has more recently made an aggressive bid to expand its business through acquisitions. In May, the company closed its acquisition of HSBC Holdings PLC's (HBC, 0005.HK, HSBA.LN) U.S. credit-card operations, which includes about $28 billion in loans and bolsters Capital One's size in the market for so-called private-label credit cards, which are issued in the names of retailers and other partners.

It also paid $9 billion earlier this year to buy ING Direct USA, the online banking business of ING Groep NV (ING, INGA.AE).

"Capital One posted solid results across all of our businesses in the third quarter, including strong contributions from ING Direct and the HSBC U.S. credit-card business," said Chairman and Chief Executive Richard D. Fairbank. "We are well positioned to sustain strong returns and capital generation, even in an environment with low industry growth and prolonged low interest rates."

For the latest quarter, Capital One posted a profit of $1.17 billion, or $2.01 a share, up from $813 million, or $1.77 a share, a year earlier. Revenue climbed 39% to $5.78 billion.

Analysts polled by Thomson Reuters had projected earnings of $1.66 a share and revenue of $5.64 billion.

Capital One was helped in part by fewer acquisition-related charges in the quarter.

While in the previous quarter Capital One took a $1.2 billion charge to build its loan-loss allowance for loans it acquired through the HSBC deal, it took a lower build in the third quarter quarter, the company said.

Its provision for credit losses increased 63% from a year earlier to $1.01 billion but was down 40% from the previous quarter, which it said was due to a smaller allowance build tied to HSBC.

The company has warned that over time, its overall card charge-offs from loans that aren't paid back could rise because the kinds of loans Capital One acquired with HSBC's portfolio typically have higher loss rates than the cards Capital One has traditionally issued.

A significant portion of HSBC's portfolio included private-label card loans. Mr. Fairbank said during a conference call with analysts that the performance of such loans are likely to have more pronounced fluctuation depending on seasonal patterns.

"Now that we have a larger partnership business, we expect that this seasonal patterns will be more pronounced," he said.

Average loans held for investment totaled $202.9 billion in the third quarter, up from $129 billion a year earlier due to the acquisitions and an increase from $192.6 billion in the previous quarter.

Average loan balances will decline next year as the company expects further run-off in certain portfolios, including about $9 billion of home loans inherited through acquisitions, about $2 billion in "high-margin, high-loss" loans gained through the HSBC business acquisition and about $140 million of commercial real-estate loans, Mr. Fairbank said.

Capital One ended the quarter with a Tier 1 common ratio--a key measure of capital strength--of 10.7%, up from 10% a year earlier.

Chief Financial Officer Gary Perlin said during the call that the company expects to meet an expected 8% ratio target under proposed capital requirements called Basel III in 2013. It estimated its current ratio under the proposed Basel III rules would have been in the "high 7% range" in the third quarter.

Credit quality improved on a year-over-year basis. The total net charge-off rate was 1.75%, compared with 2.52% a year earlier and 1.53% in the prior quarter. Charge-offs are loans banks don't expect to be able to collect.

The increase in the net charge-off rate from the previous quarter was mainly due to waning benefits of a so-called credit mark of $666 million, which was reserved for expected losses in the HSBC portfolio. The credit mark absorbed $176 million in loan losses in the third quarter, down from $251 million in losses in the second quarter.

Capital One's overall delinquency rate was 2.54%, compared with 3.13% in the year-ago period and 2.06% in the previous quarter.

The charge-off rate for Capital One's U.S. card business was 3.04%, down from 3.92% a year ago and up from the second quarter's 2.86%. Delinquencies in the domestic card business reached 3.52%, compared with 3.65% in the year-ago period and 2.79% in the previous quarter.

Net interest income rose 42% while noninterest income more than doubled.

Operating expenses jumped 37%.

Write to Nathalie Tadena at [e-mail] and Andrew R. Johnson at [e-mail]

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