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Fall in interest earnings assets dragged Capital One Financial Corp.’s (COF - Analyst Report) fourth-quarter earnings of $1.45 per share, which missed the Zacks Consensus Estimate by 5.8%. However, earnings were above the prior-year quarter level of $1.41.

Capital One’s results failed to meet investors’ expectations as its share price declined nearly 2% in the after-hour trading session on Thursday. However, the performance of the stock in today’s trading session will give a better idea about the investors’ sentiments on the company’s results.

Lower-than-expected results were primarily due to a decline in net interest income and a slight rise in operating expenses. These were partially offset by growth in fee income and lower provision for credit losses. Further, credit quality and capital ratios improved, while profitability ratios were a mixed bag.

Net income from continuing operations in the reported quarter came in at $882 million or $1.48 per share, up from $848 million or $1.42 per share in the year-ago quarter.

For the full year 2013, earnings per share were $6.96 per share, up 13.0% year over year. However, earnings missed the Zacks Consensus Estimate of $7.06.

Quarterly Performance

Capital One’s net revenue was $5.54 billion, down 1.4% year over year. However, it surpassed the Zacks Consensus Estimate of $5.44 billion.

Net interest income fell 2.3% from the previous-year quarter to $4.42 billion. However, net interest margin grew 21 basis points (bps) year over year to 6.73%.

Non-interest income increased 2.3% year over year to $1.12 billion. The rise was mainly due to higher net interchange fees and other income, partially offset by a decrease in service charges and other customer-related fees.

Non-interest expenses inched up 0.8% from the prior-year quarter to $3.28 billion. The increase was mainly due to rise in salaries and associate benefits costs as well as marketing expenses, partially offset by fall in other expenses.

The efficiency ratio deteriorated to 59.16% from 57.88% in the prior-year quarter. A rise in efficiency ratio indicates decline in profitability.

Credit Quality

Capital One’s credit quality showed improvement with provision for credit losses declining 16.9% year over year to $957 million. Further, net charge-off rate decreased 25 bps year over year to 2.01%.

Moreover, the 30-plus day performing delinquency rate fell 7 bps from the year-ago quarter to 2.63%. Additionally, allowance, as a percentage of reported loans held for investment, came in at 2.19%, down 31 bps from the previous-year quarter.

Capital and Profitability Ratios

Capital One’s profitability ratios were a mixed bag. As of Dec 31, 2013, return on average assets grew to 1.20% from 1.10% as of Dec 31, 2012. However, return on average common equity declined to 8.32% from 8.44% in the prior year.

The company’s capital ratios continued to improve. As of Dec 31, 2013, Tier 1 risk-based capital ratio came in at 12.6%, up from 11.3% as of Dec 31, 2012. Moreover, total risk-based capital ratio grew to 14.7% from 13.6% as of Dec 31, 2012.

2014 Guidance

Management expects GAAP pre-provision earnings (excluding non-recurring items) to be nearly $9.8 billion. Further, operating expenses are expected to be roughly $10.5 billion, with marketing expenses to rise.

Performance of Other Card Servicing Firm

Similar to Capital One, SLM Corp.’s (SLM - Analyst Report) fourth-quarter earnings missed the Zacks Consensus Estimate by 13%. Results were adversely impacted by rise in expenses, fall in net interest income as well as higher losses on derivative and hedging actions. However, these were partially offset by lower loan-loss provisions and increase in loan originations.

Our Viewpoint

We anticipate continued synergies from Capital One’s geographic diversification and its major acquisitions, namely HSBC Holdings plc’s (HSBC - Analyst Report) 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 loan demand, persistent rise in operating expenses and the impact of new financial regulations are expected to affect results in the near term.

Currently, Capital One carries a Zacks Rank #3 (Hold).

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