Robust Earnings for Capital One - Analyst Blog

Capital One Financial Corp.’s (COF) second-quarter 2013 earnings of $1.87 per share surpassed the Zacks Consensus Estimate of $1.74. Moreover, this was above $1.79 earned in the prior-year quarter.

Better-than-expected results were aided by top-line growth, partially offset by a rise in operating expenses. Moreover, strong profitability and capital ratios, along with an improving asset quality were the other highlights. Further, enhanced capital deployment depicts a robust balance sheet position.

Net income from continuing operations for the second quarter came in at $1.24 billion or $2.07 per share, compared with $1.14 billion or $1.92 per share in the previous quarter.

Performance in Detail

Capital One’s net revenue for the reported quarter was $5.64 billion, up 1.7% sequentially. Moreover, net revenue beat the Zacks Consensus Estimate of $5.52 billion.

Net interest income for the quarter declined marginally from the previous quarter to $4.55 billion. However, net interest margin increased 12 basis points (bps) sequentially to 6.83%.

Non-interest income grew 10.6% from $981 million in the last quarter to $1.09 billion in the reported quarter. The rise was mainly driven by an increase in interchange fees.

Capital One’s operating expenses inched up 1.0% from the prior quarter to $3.06 billion. The rise was mainly due to an increase in salaries and associate benefits costs, partly offset by a decline in marketing expenses as well as acquisition-related costs.

The managed efficiency ratio improved to 54.26% from 54.55% in the prior quarter. A fall in efficiency ratio indicates rise in profitability.

Credit Quality

Capital One’s credit quality improved during the reported quarter. Net charge-off rate declined 17 bps sequentially to 2.03%. Similarly, the 30-plus day performing delinquency rate decreased 2 bps from the prior quarter to 2.35%.

Moreover, allowance, as a percentage of reported loans held for investment, came in at 2.30%, down 11 bps from the previous quarter. Additionally, provision for credit losses plunged 13.9% sequentially to $762 million.

Capital and Profitability Ratios

Capital One’s capital and profitability ratios continued to improve in the reported quarter. As of Jun 30, 2013, return on average assets improved to 1.66% from 1.51% as of Mar 31, 2013. Similarly, return on average common equity improved to 11.97% from 11.23% in the prior quarter.

As of Jun 30, 2013, Tier 1 risk-based capital ratio came in at 12.4%, up from 12.2% as of Mar 31, 2013. Moreover, total risk-based capital ratio grew to 14.7% from 14.4% as of Mar 31, 2013.

Further, the company’s tangible book value per share was $41.57 as of Jun 30, 2013, down from $41.87 as of Mar 31, 2013.

Capital Deployment Plans

Earlier this month, Capital One announced a repurchase authorization of up to $1.0 billion shares by its board of directors. This followed the Federal Reserve’s approval of its capital plan in March. However, this buyback program under which shares can be repurchased through Mar 2014, is subject to certain conditions.

Capital One will be allowed to undertake the repurchase program after it successfully completes the sale of Best Buy Co.’s credit-card business to Citigroup Inc. (C). This deal is expected to close in the third quarter of 2013.

Additionally, consistent with its capital plan, In May 2013, Capital One hiked its quarterly dividend 500% to 30 cents per share. The new dividend was paid on May 23, 2013 to shareholders of record as on May 13, 2013.

Our Viewpoint

We anticipate continued synergies from Capital One’s geographic diversification and 2 of its major acquisitions, namely HSBC Holdings plc’s (HBC) credit card business and ING Direct USA, the online banking unit of ING Groep NV (ING). Moreover, the resilience shown by most of the company’s businesses will continue to support its financials.

Nevertheless, exposure to commercial real estate, a weak demand for loans and the impact of new financial regulations are expected to dent results in the near term.

Capital One currently carries a Zacks Rank #2 (Buy).

CITIGROUP INC (C): Free Stock Analysis Report

CAPITAL ONE FIN (COF): Free Stock Analysis Report

HSBC HOLDINGS (HBC): Free Stock Analysis Report

ING GROEP-ADR (ING): Free Stock Analysis Report

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