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Capital One Outperforms
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Capital One Financial Corp.’s (COF - Analyst Report) second quarter earnings from continuing operations of $1.78 per share were substantially better than the Zacks Consensus Estimate of 88 cents. This also compares very favorably with a net loss of 64 cents in the year-ago period.
Results for the quarter benefited over the prior-year quarter primarily from a lower provision for loan losses due to improved credit performance and increased revenue. Also, resilience and strong profitability of almost all of its businesses has acted as positive catalysts in this sluggish economic recovery phase. However, an increase in operating expenses was the downside.
Total revenues for the reported quarter came in at $3.9 billion, up 22.9% from $3.2 billion in the prior-year quarter. On a non-GAAP basis, total revenue decreased 5.9% from the year-ago quarter to $3.9 billion. Revenues missed the Zacks Consensus Estimate of $4.0 billion.
Capital One’s net income from continuing operations was $812 million, up from $229 million in the prior-year quarter. The results for the year-ago quarter were significantly impacted by a higher loan loss provision.
Adjusting the loss from discontinued operations, Capital One’s GAAP net income came in at $608 million or $1.33 per share, compared with a net loss of $277 million or 66 cents in the earlier quarter.
Behind the Headlines
Non-GAAP net interest margin (NIM) remained almost flat sequentially but increased 90 bps on a year-over-year basis to 7.09%. The sequential stability was driven by a 7-bp decrease in cost of funds, partially offset by a 5-bp decrease in loan yields.
Net interest income decreased 4.1% sequentially but improved 4.7% year-over-year to $3.1 billion. Non-interest income decreased 23.9% sequentially and 32.2% year-over-year to $807 million.
Non-GAAP provision for loan losses decreased 51.1% sequentially and 62.0% year-over-year to $723 million. The sequential decrease in managed provision for loan losses was driven by lower charge-offs and a reduction in the allowance balance of $1.0 billion.
Capital One’s operating expenses for the reported quarter increased 6.8% sequentially and 2.1% year-over-year to $1.8 billion. The managed efficiency ratio increased to 51.23% from 43.06% in the prior quarter and 45.29% in the prior-year quarter.
Credit Quality
Capital One’s credit quality improved during the quarter. Allowance as a percentage of reported loans held for investment decreased 66 bps sequentially to 5.63%. Also, the net charge-off rate has decreased 71 bps sequentially to 5.64%. The 30-plus day performing delinquency rate decreased 45 bps sequentially to 4.01%.
Capital and Profitability Ratios
Capital One’s tangible common equity (TCE) ratio for the quarter was 6.14%, up from the prior quarter level of 5.53%. The Tier 1 risk-based capital ratio increased 30 bps relative to the prior quarter to 9.9%, and continues to stay above the regulatory well-capitalized minimum.
Tangible book value per share of common stock was $24.89 as of June 30, 2010, compared to $22.86 as of March 31, 2010 and $24.95 as of June 30, 2009.
We anticipate continued synergies from Capital One’s geographic diversification and expense management initiatives. Additionally, the resilience of almost all of its businesses will continue to support the company’s financials. However, its commercial real estate exposure will remain a drag. Also, we believe a weakening demand for new loans will restrict earnings in the near future.
Capital One currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.
Comparison with Main Competitor
Rival card company American Express (AXP - Analyst Report) also reported its second quarter results concurrently with Capital One’s earnings release after the market closed on July 22, 2010. AmEx’s second-quarter earnings from continuing operations of 84 cents per share were 6 cents ahead of the Zacks Consensus Estimate of 78 cents.
Results for the quarter benefited over the prior-year quarter primarily from a lower provision for loan losses due to improved credit performance and increased revenue. Also, resilience and strong profitability of almost all of its businesses has acted as positive catalysts in this sluggish economic recovery phase. However, an increase in operating expenses was the downside.
Total revenues for the reported quarter came in at $3.9 billion, up 22.9% from $3.2 billion in the prior-year quarter. On a non-GAAP basis, total revenue decreased 5.9% from the year-ago quarter to $3.9 billion. Revenues missed the Zacks Consensus Estimate of $4.0 billion.
Capital One’s net income from continuing operations was $812 million, up from $229 million in the prior-year quarter. The results for the year-ago quarter were significantly impacted by a higher loan loss provision.
Adjusting the loss from discontinued operations, Capital One’s GAAP net income came in at $608 million or $1.33 per share, compared with a net loss of $277 million or 66 cents in the earlier quarter.
Behind the Headlines
Non-GAAP net interest margin (NIM) remained almost flat sequentially but increased 90 bps on a year-over-year basis to 7.09%. The sequential stability was driven by a 7-bp decrease in cost of funds, partially offset by a 5-bp decrease in loan yields.
Net interest income decreased 4.1% sequentially but improved 4.7% year-over-year to $3.1 billion. Non-interest income decreased 23.9% sequentially and 32.2% year-over-year to $807 million.
Non-GAAP provision for loan losses decreased 51.1% sequentially and 62.0% year-over-year to $723 million. The sequential decrease in managed provision for loan losses was driven by lower charge-offs and a reduction in the allowance balance of $1.0 billion.
Capital One’s operating expenses for the reported quarter increased 6.8% sequentially and 2.1% year-over-year to $1.8 billion. The managed efficiency ratio increased to 51.23% from 43.06% in the prior quarter and 45.29% in the prior-year quarter.
Credit Quality
Capital One’s credit quality improved during the quarter. Allowance as a percentage of reported loans held for investment decreased 66 bps sequentially to 5.63%. Also, the net charge-off rate has decreased 71 bps sequentially to 5.64%. The 30-plus day performing delinquency rate decreased 45 bps sequentially to 4.01%.
Capital and Profitability Ratios
Capital One’s tangible common equity (TCE) ratio for the quarter was 6.14%, up from the prior quarter level of 5.53%. The Tier 1 risk-based capital ratio increased 30 bps relative to the prior quarter to 9.9%, and continues to stay above the regulatory well-capitalized minimum.
Tangible book value per share of common stock was $24.89 as of June 30, 2010, compared to $22.86 as of March 31, 2010 and $24.95 as of June 30, 2009.
We anticipate continued synergies from Capital One’s geographic diversification and expense management initiatives. Additionally, the resilience of almost all of its businesses will continue to support the company’s financials. However, its commercial real estate exposure will remain a drag. Also, we believe a weakening demand for new loans will restrict earnings in the near future.
Capital One currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.
Comparison with Main Competitor
Rival card company American Express (AXP - Analyst Report) also reported its second quarter results concurrently with Capital One’s earnings release after the market closed on July 22, 2010. AmEx’s second-quarter earnings from continuing operations of 84 cents per share were 6 cents ahead of the Zacks Consensus Estimate of 78 cents.
Read the full analyst report on COF
Read the full analyst report on AXP
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