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Capital One (COF) Gains on Q2 Earnings Beat, Provisions Rise
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Shares of Capital One Financial Corporation (COF - Free Report) jumped 4.4% in the after-market trading as the company’s second-quarter 2017 adjusted earnings of $1.96 per share surpassed the Zacks Consensus Estimate of $1.90. Also, it compared favorably with the year-ago quarter’s earnings of $1.76.
Better-than-expected results were attributable to higher revenues and easing margin pressure. Also, the quarter witnessed a rise in loan balance. However, an increase in provisions and rising expenses acted as headwinds.
After considering certain non-recurring items, net income for the quarter came in at $1.04 billion or $1.94 per share, up from $942 million or $1.69 per share in the prior-year quarter.
Rise in Revenues Supports Results
Net revenue was $6.70 billion, up 7% year over year. Also, the figure topped the Zacks Consensus Estimate of $6.68 billion.
Net interest income rose 7% from the prior-year quarter to $5.47 billion. Also, net interest margin increased 15 basis points (bps) year over year to 6.88%.
Non-interest income grew 6% year over year to $1.23 billion. The increase was largely driven by a rise in service charges and other customer-related fees, and net interchange fees, partially offset by a decline in other income.
Non-interest expenses of $3.41 billion increased 4% from the year-ago quarter. All cost components, except amortization of intangibles, and communications and data processing, rose year over year.
Efficiency ratio came in at 50.92% compared with 52.69% in the year-ago quarter. A decrease in efficiency ratio indicates improved profitability.
Strong Balance Sheet
As of Jun 30, 2017, loans held for investment were $244.3 billion, up 2% on a sequential basis. However, total deposits, as of the same date, declined 1% from the prior quarter to $239.76 billion.
Total stockholder’s equity was $49.14 billion as of Jun 30, 2017, a rise of 2% from the previous quarter.
Worsening Credit Quality
Net charge-off rate rose 66 bps year over year to 2.67%. Further, provision for credit losses jumped 13% from the year-ago quarter to $1.80 billion.
Also, the 30-plus day performing delinquency rate increased 22 bps year over year to 2.69%. Likewise, allowance, as a percentage of reported loans held for investment was 2.93%, up 42 bps year over year.
Strong Profitability & Capital Ratios
Return on average assets was 1.20% at the end of the reported quarter, up from 1.13% in the year-ago quarter. Also, return on average common equity increased to 8.59% from 7.64% in the prior-year quarter.
As of Jun 30, 2017, Tier 1 risk-based capital ratio was 12.2%, on par with the prior-year quarter. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.7% as of Jun 30, 2017, down from 10.9% as of Jun 30, 2016.
Our Viewpoint
The company’s strategic acquisitions – General Electric Company’s (GE - Free Report) healthcare-related loans and its Healthcare Financial Services business, HSBC Holdings plc’s (HSBC - Free Report) credit card business and ING Direct USA, the online banking unit of ING Groep NV (ING - Free Report) – over the years have supported its financials. However, increasing expenses continue to hurt Capital One's profitability. Also, deteriorating credit quality remains a major near-term concern. In fact, asset quality is likely to continue to remain under pressure due to losses in the auto portfolio and U.S. card business.
Capital One Financial Corporation Price, Consensus and EPS Surprise
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Capital One (COF) Gains on Q2 Earnings Beat, Provisions Rise
Shares of Capital One Financial Corporation (COF - Free Report) jumped 4.4% in the after-market trading as the company’s second-quarter 2017 adjusted earnings of $1.96 per share surpassed the Zacks Consensus Estimate of $1.90. Also, it compared favorably with the year-ago quarter’s earnings of $1.76.
Better-than-expected results were attributable to higher revenues and easing margin pressure. Also, the quarter witnessed a rise in loan balance. However, an increase in provisions and rising expenses acted as headwinds.
After considering certain non-recurring items, net income for the quarter came in at $1.04 billion or $1.94 per share, up from $942 million or $1.69 per share in the prior-year quarter.
Rise in Revenues Supports Results
Net revenue was $6.70 billion, up 7% year over year. Also, the figure topped the Zacks Consensus Estimate of $6.68 billion.
Net interest income rose 7% from the prior-year quarter to $5.47 billion. Also, net interest margin increased 15 basis points (bps) year over year to 6.88%.
Non-interest income grew 6% year over year to $1.23 billion. The increase was largely driven by a rise in service charges and other customer-related fees, and net interchange fees, partially offset by a decline in other income.
Non-interest expenses of $3.41 billion increased 4% from the year-ago quarter. All cost components, except amortization of intangibles, and communications and data processing, rose year over year.
Efficiency ratio came in at 50.92% compared with 52.69% in the year-ago quarter. A decrease in efficiency ratio indicates improved profitability.
Strong Balance Sheet
As of Jun 30, 2017, loans held for investment were $244.3 billion, up 2% on a sequential basis. However, total deposits, as of the same date, declined 1% from the prior quarter to $239.76 billion.
Total stockholder’s equity was $49.14 billion as of Jun 30, 2017, a rise of 2% from the previous quarter.
Worsening Credit Quality
Net charge-off rate rose 66 bps year over year to 2.67%. Further, provision for credit losses jumped 13% from the year-ago quarter to $1.80 billion.
Also, the 30-plus day performing delinquency rate increased 22 bps year over year to 2.69%. Likewise, allowance, as a percentage of reported loans held for investment was 2.93%, up 42 bps year over year.
Strong Profitability & Capital Ratios
Return on average assets was 1.20% at the end of the reported quarter, up from 1.13% in the year-ago quarter. Also, return on average common equity increased to 8.59% from 7.64% in the prior-year quarter.
As of Jun 30, 2017, Tier 1 risk-based capital ratio was 12.2%, on par with the prior-year quarter. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.7% as of Jun 30, 2017, down from 10.9% as of Jun 30, 2016.
Our Viewpoint
The company’s strategic acquisitions – General Electric Company’s (GE - Free Report) healthcare-related loans and its Healthcare Financial Services business, HSBC Holdings plc’s (HSBC - Free Report) credit card business and ING Direct USA, the online banking unit of ING Groep NV (ING - Free Report) – over the years have supported its financials. However, increasing expenses continue to hurt Capital One's profitability. Also, deteriorating credit quality remains a major near-term concern. In fact, asset quality is likely to continue to remain under pressure due to losses in the auto portfolio and U.S. card business.
Capital One Financial Corporation Price, Consensus and EPS Surprise
Capital One Financial Corporation Price, Consensus and EPS Surprise | Capital One Financial Corporation Quote
Currently, Capital One carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
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