CHARLOTTE, North Carolina Capital One Financial Corp (COF.N) said on Wednesday its second-quarter profit jumped 50 percent as fewer customers defaulted on credit cards, a sign consumer loans might be a bright spot for other major banks.
Capital One also raised $2 billion through a stock offering on Wednesday, selling 40 million shares at $50.87 each. The bank had said the issue would fund its previously announced acquisition of ING Groep NV's (ING.AS) U.S. online bank.
Over the next 10 days, most of the top U.S. banks are due to report quarterly results, starting with JPMorgan Chase & Co (JPM.N) on Thursday.
Capital One, a bank whose results are closely linked to credit cards, earned $911 million, or $1.97 per share, in the second quarter, up from $608 million, or $1.33 per share, a year earlier. Analysts on average had expected $1.71 a share, according to Thomson Reuters I/B/E/S.
The bank's profit gains were driven primarily by writing off fewer bad loans and releasing funds previously set aside to cover bad loans. But revenue growth was tepid.
The bank's net charge-off rate -- the percentage of defaulted loans being written off -- fell to 2.91 percent from 5.36 percent a year earlier, while revenue rose just 2.3 percent to $3.99 billion. Net interest income edged up to $3.14 billion from $3.1 billion.
Capital One's credit card charge-offs declined by nearly half, to 5.06 percent from 9.36 percent. The decline matched projections by industry analysts, who note most banks have weeded out their weakest credit card borrowers, nearly three years after the financial crisis peaked, and credit card defaults will continue to shrink.
In a May report, Moodys Corp (MCO.N) analysts projected industrywide credit card charge-offs will decline to a two-decade low of 4 percent by the end of 2012.
Banks are only now starting to ramp up credit card lending. That means that, even if defaults rise, they will not likely rise until next year, since there is often a lag between when a credit card account is opened and when default occurs.
Overall, the amount McLean, Virginia-based Capital One set aside to cover problem loans fell to $343 million in the second quarter from $723 million a year earlier.
Capital One said its $2 billion stock offering will be underwritten by Barclays Capital, Morgan Stanley, Bank of America Merrill Lynch and JPMorgan.
The bank also entered into a forward sale agreement with Barclays Capital and Morgan Stanley. The agreement sells shares at the current stock price, but shares will not change hands until seven months after the date of the stock offering.
Chip MacDonald, a banking attorney with Jones Day, said the deal will allow the bank to show regulators that Capital One has the capital to absorb ING's operations, without additional shareholder dilution months before the acquisition is completed.
In June, the bank announced plans to buy ING's U.S. online bank for $9 billion in cash and stock.
For Capital One, the deal is part of its push to further expand its banking operation. The company spent much of the past decade transforming from a specialty credit card lender that mainly funded itself in the bond market, into a bank that relies heavily on deposits.
Now, facing weakened loan demand after the financial crisis, the bank is again looking for deals to expand its business. This spring, Capital One bought $3.7 billion of credit card loans from JPMorgan Chase as part of a deal to issue credit cards on behalf of retailer Kohl's Corp (KSS.N).
The bank may bid on HSBC's U.S. credit card assets, sources have told Reuters.
For ING, the sale is part of a restructuring forced by a 10 billion euro bailout received during the 2008 financial crisis.
When completed, the deal will make Capital One the seventh-largest U.S. bank by assets.
ING will receive a 9.9 percent stake in Capital One as part of the deal and the right to appoint a board member.
Capital One shares closed down $1.37, or 2.6 percent, at $50.87 on the New York Stock Exchange.
(Reporting by Joe Rauch in Charlotte; Anil D'Silva and Tanya Agrawal in Bangalore; additional reporting by Maria Aspan in New York and Clare Baldwin in Detroit; editing by Gopakumar Warrier, John Wallace and Andre Grenon)