Continuing with its trend of delivering positive earnings surprise since the last two quarters, Capital One Financial Corp.’s (COF - Analyst Report) third-quarter 2013 earnings per share of $1.86 outpaced the Zacks Consensus Estimate of $1.77. However, this was 7.5% below $2.01 earned in the prior-year quarter.
Our proven model also predicted that Capital One will beat earnings as it had the right combination of two key ingredients – Earnings ESP of +3.39% and Zacks Rank #2 (Buy).
The quarter witnessed higher-than-expected revenues and improved profitability ratios. However, higher expenses and deteriorating capital ratios were the dampeners. Meanwhile, asset quality was a mixed bag.
Net income from continuing operations came in at $1.13 billion or $1.88 per share, down from $1.19 billion or $2.03 per share in the year-ago quarter.
Behind the Headlines
Capital One’s net revenue for the reported quarter was $5.65 billion, down 2.3% year over year. However, it surpassed the Zacks Consensus Estimate of $5.57 billion.
Net interest income fell 1.9% from the previous-year quarter to $4.56 billion. Further, net interest margin decreased 8 basis points (bps) year over year to 6.89%.
Non-interest income fell 4.0% from $1.14 billion in the last year quarter to $1.09 billion in the reported quarter. The decline was mainly due to a decrease in other income as well as service charges and other customer-related fees, partially offset by higher net interchange fees.
Non-interest expenses rose 3.3% from the prior-year quarter to $3.15 billion. The increase was mainly due to rise in salaries and associate benefits costs as well as occupancy and equipment expenses, partly offset by decline in marketing expenses and acquisition-related costs.
The managed efficiency ratio deteriorated to 55.69% from 52.66% in the prior-year quarter. A rise in efficiency ratio indicates decline in profitability.
Capital One’s credit quality was a mix bag. Net charge-off rate increased 17 bps year over year to 1.92%. The 30-plus day performing delinquency rate was stable from the year-ago quarter level at 2.54%.
However, allowance, as a percentage of reported loans held for investment, came in at 2.26%, down 28 bps from the previous-year quarter. Further, provision for credit losses fell 16.3% year over year to $849 million.
Capital and Profitability Ratios
Capital One’s capital ratios deteriorated in the reported quarter. As of Sep 30, 2013, return on average assets fell to 1.53% from 1.60% as of Sep 30, 2012. Similarly, return on average common equity declined to 11.00% from 12.43% in the prior-year quarter.
Capital One’s profitability ratios continued to improve. As of Sep 30, 2013, Tier 1 risk-based capital ratio came in at 13.1%, up from 12.7% as of Sep 30, 2012. Moreover, total risk-based capital ratio grew to 15.3% from 15.0% as of Sep 30, 2012.
In Sep 2013, Capital One completed the sale of certain private label and co-branded credit card accounts to Citigroup, Inc. (C - Analyst Report). These card portfolios – worth nearly $6 billion in receivables – were related to electronics retailer, Best Buy Co Inc.
Moreover, with the closure of the deal, Capital One will likely be begin its share repurchase program. The company, in July, had announced a share repurchase program worth approximately $1 billion through Mar 2014, following the approval of its capital plan in March.
We anticipate continued synergies from Capital One’s geographic diversification and its major acquisitions, namely HSBC Holdings plc’s credit card business and ING Direct USA – the online banking unit of ING Groep NV (ING - Snapshot Report). Moreover, the resilience shown by most of the company’s businesses will continue to support its financials going forward.
Nevertheless, exposure to commercial real estate, a weak demand for loans, persistent rise in operating expenses and the impact of new financial regulations are expected to affect results in the near term.