UPDATE 2-Capital One profit boosted by higher credit card spending

Thu Jul 18, 2013 7:28pm EDT

* 2nd-qtr net profit rises to $1.10 bln from $92 mln

* Net interest income from credit cards up 19 pct

* Provision for credit losses down 55 pct

* Shares up about 2 pct in post-market trading

By Avik Das

July 18 (Reuters) - A gradual recovery in U.S. consumer spending helped Capital One Financial Corp to raise net interest income from its credit card business in the second quarter and beat Wall Street forecasts on earnings.

Capital One, one of the largest credit card issuers in the United States, expects its strong performance to continue in the third quarter, Chief Executive Richard Fairbank said. Its shares were up 2 percent in after-hours trading.

Net interest income, the difference between what banks earn on loans and pay out on deposits, rose about 14 percent to $4.55 billion in the second quarter, Capital One said.

Net interest income specifically from its credit card business rose 19 percent to $2.80 billion. U.S.-issued cards contributed 90 percent of the total.

U.S. consumer spending in the second quarter is expected to have risen 8 percent, compared with 7 percent in the preceding quarter, Credit Suisse has estimated.

American Express Co said on Wednesday that cardmember spending rose 8 percent in the second quarter after adjusting for foreign currency translations.

Susquehanna analyst James Friedman said Capital One was one of the few companies to have seen an improvement in its net interest margin. The bank's revenue has grown at a faster pace than its expenses, he said.

Net interest margin rose to 6.83 percent in the second quarter from 6.04 percent a year earlier.

Capital One, which has a market value of about $39 billion, set aside $762 million to cover bad loans in the second quarter, down 55 percent from a year earlier.

The lender had set aside $1.2 billion in the year-ago quarter for non-impaired loans from its purchase of HSBC Plc's U.S. credit card portfolio.

Net income rose to $1.10 billion, or $1.87 per share, from $92 million, or 16 cents per share, a year earlier. Net revenue rose 12 percent to $5.64 billion.

Analysts on average had expected earnings of $1.72 per share on revenue of $5.53 billion, according to Thomson Reuters I/B/E/S.

The company's net charge-off rate, the percentage of loans written off as unrecoverable, fell to 2.03 percent from 2.20 percent in the preceding quarter.

"We generally see some seasonal improvement this time of year, although what we saw in the second quarter was better than what we would expect," Fairbank said on a post-earnings call.

Capital One, which passed the U.S. Federal Reserve's stress test in March, said this month it would buy back up to $1 billion in shares after completing the sale of its Best Buy Co Inc portfolio in the third quarter.

The bank has spent much of the past decade transforming itself from a specialty credit card lender dependent on bond market funding into a bank that relies on deposits. It is now one of the top 10 U.S. banks by deposits, and has over 1,000 branches.

McLean, Virginia-based Capital One's shares closed at $67.05 on the New York Stock Exchange on Thursday.

They have risen about 27 percent since the company's last quarterly results in April, outperforming the Thomson Reuters Consumer Financial Services Index, which has risen about 18 percent in the same period.

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