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Capital One (COF) Down on Q3 Earnings Miss as Provisions Rise
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Shares of Capital One (COF - Free Report) lost 4.7% in after-hours trading in response to lower-than-expected third-quarter 2022 results. Earnings of $4.20 per share lagged the Zacks Consensus Estimate of $5.03. The bottom line also plunged 38% from the year-ago quarter. Our estimate for earnings was $5.12.
Results were adversely impacted by higher provisions for credit losses on the worsening macroeconomic environment and recessionary fears. Also, an increase in operating expenses acted as a headwind.
Yet, a robust improvement in loan balances and higher interest rates aided net interest income (NII). Further decent consumer sentiments supported the credit card business and non-interest income.
Net income available to common shareholders was $1.62 billion, plunging 46% from the prior-year quarter.
Revenues & Expenses Rise
Total net revenues were $8.81 billion, up 12% from the prior-year quarter. The top line also beat the Zacks Consensus Estimate of $8.60 billion. We had projected revenues to be $8.52 billion.
NII improved 14% from the prior-year quarter to $7 billion. Net interest margin (NIM) surged 45 basis points (bps) to 6.80%. This was largely driven by lower average cash and securities balances and higher yields on average interest-earning assets. Our estimates for NII and NIM were $6.67 billion and 6.69%, respectively.
Non-interest income of $1.8 billion rose 8%. This was primarily attributable to growth in net interchange fees (up 17%) and service charges and other customer-related fees (up 2%). On the other hand, other non-interest income declined 22%. Our estimate for the metric was pegged at $1.85 billion.
Non-interest expenses were $4.95 billion, rising 18%. The increase was mainly due to a 32% surge in professional services and a 30% rise in marketing costs. We had expected this metric to be $4.94 billion.
Efficiency ratio was 56.21%, up from 53.46% in the year-ago quarter. A rise in efficiency ratio indicates a deterioration in profitability.
As of Sep 30, 2022, loans held for investment were $303.9 billion, up 3% from the prior quarter. Total deposits, as of the same date, also grew 3% to $317.2 billion.
Credit Quality Worsens
Provision for credit losses was $1.67 billion in the reported quarter against a provision benefit of $342 million in the prior-year quarter. We had anticipated the metric to be $1.07 billion.
The 30-plus day performing delinquency rate rose 61 bps to 2.58%. Also, the net charge-off rate jumped 57 bps year over year to 1.24%.
However, allowance, as a percentage of reported loans held for investment, was 4.02%, down 41 bps.
Capital & Profitability Ratios Deteriorates
As of Sep 30, 2022, Tier 1 risk-based capital ratio was 13.6%, down from 15.7% a year ago. Common equity Tier 1 capital ratio was 12.2% as of Sep 30, 2022, down from 13.8%.
At the end of the third quarter, return on average assets was 1.52%, down from the year-ago period’s 2.92%. Return on average common equity was 13.01%, down from 20.52%.
Share Repurchase Update
During the quarter, Capital One repurchased 2.9 million shares for $313 million.
Our View
Capital One’s strategic acquisitions, rise in demand for consumer loans, higher rates and steady improvement in the card business position it well for long-term growth. However, mounting expenses and a deteriorating macroeconomic backdrop are major near-term concerns.
Capital One Financial Corporation Price, Consensus and EPS Surprise
Ally Financial’s (ALLY - Free Report) third-quarter 2022 adjusted earnings of $1.12 per share lagged the Zacks Consensus Estimate of $1.73. The bottom line reflects a decline of 48.1% from the year-ago quarter. Our estimate for earnings was $1.75.
Results were primarily hurt by a rise in expenses, a decline in other revenues and higher provisions. However, an improvement in net financing revenues was an offsetting factor. ALLY witnessed a rise in loan balances in the reported quarter.
Navient Corporation’s (NAVI - Free Report) third-quarter 2022 adjusted core earnings per share of 75 cents missed the Zacks Consensus Estimate of 77 cents. Also, the bottom line was lower than the prior-year quarter’s 92 cents.
The results of Navient were affected by the fall in non-interest income and NII. An increase in the provision for loan losses also dragged the results. Nonetheless, lower expenses aided the company.
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Capital One (COF) Down on Q3 Earnings Miss as Provisions Rise
Shares of Capital One (COF - Free Report) lost 4.7% in after-hours trading in response to lower-than-expected third-quarter 2022 results. Earnings of $4.20 per share lagged the Zacks Consensus Estimate of $5.03. The bottom line also plunged 38% from the year-ago quarter. Our estimate for earnings was $5.12.
Results were adversely impacted by higher provisions for credit losses on the worsening macroeconomic environment and recessionary fears. Also, an increase in operating expenses acted as a headwind.
Yet, a robust improvement in loan balances and higher interest rates aided net interest income (NII). Further decent consumer sentiments supported the credit card business and non-interest income.
Net income available to common shareholders was $1.62 billion, plunging 46% from the prior-year quarter.
Revenues & Expenses Rise
Total net revenues were $8.81 billion, up 12% from the prior-year quarter. The top line also beat the Zacks Consensus Estimate of $8.60 billion. We had projected revenues to be $8.52 billion.
NII improved 14% from the prior-year quarter to $7 billion. Net interest margin (NIM) surged 45 basis points (bps) to 6.80%. This was largely driven by lower average cash and securities balances and higher yields on average interest-earning assets. Our estimates for NII and NIM were $6.67 billion and 6.69%, respectively.
Non-interest income of $1.8 billion rose 8%. This was primarily attributable to growth in net interchange fees (up 17%) and service charges and other customer-related fees (up 2%). On the other hand, other non-interest income declined 22%. Our estimate for the metric was pegged at $1.85 billion.
Non-interest expenses were $4.95 billion, rising 18%. The increase was mainly due to a 32% surge in professional services and a 30% rise in marketing costs. We had expected this metric to be $4.94 billion.
Efficiency ratio was 56.21%, up from 53.46% in the year-ago quarter. A rise in efficiency ratio indicates a deterioration in profitability.
As of Sep 30, 2022, loans held for investment were $303.9 billion, up 3% from the prior quarter. Total deposits, as of the same date, also grew 3% to $317.2 billion.
Credit Quality Worsens
Provision for credit losses was $1.67 billion in the reported quarter against a provision benefit of $342 million in the prior-year quarter. We had anticipated the metric to be $1.07 billion.
The 30-plus day performing delinquency rate rose 61 bps to 2.58%. Also, the net charge-off rate jumped 57 bps year over year to 1.24%.
However, allowance, as a percentage of reported loans held for investment, was 4.02%, down 41 bps.
Capital & Profitability Ratios Deteriorates
As of Sep 30, 2022, Tier 1 risk-based capital ratio was 13.6%, down from 15.7% a year ago. Common equity Tier 1 capital ratio was 12.2% as of Sep 30, 2022, down from 13.8%.
At the end of the third quarter, return on average assets was 1.52%, down from the year-ago period’s 2.92%. Return on average common equity was 13.01%, down from 20.52%.
Share Repurchase Update
During the quarter, Capital One repurchased 2.9 million shares for $313 million.
Our View
Capital One’s strategic acquisitions, rise in demand for consumer loans, higher rates and steady improvement in the card business position it well for long-term growth. However, mounting expenses and a deteriorating macroeconomic backdrop are major near-term concerns.
Capital One Financial Corporation Price, Consensus and EPS Surprise
Capital One Financial Corporation price-consensus-eps-surprise-chart | Capital One Financial Corporation Quote
Currently, Capital One carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance Other Consumer Loan Providers
Ally Financial’s (ALLY - Free Report) third-quarter 2022 adjusted earnings of $1.12 per share lagged the Zacks Consensus Estimate of $1.73. The bottom line reflects a decline of 48.1% from the year-ago quarter. Our estimate for earnings was $1.75.
Results were primarily hurt by a rise in expenses, a decline in other revenues and higher provisions. However, an improvement in net financing revenues was an offsetting factor. ALLY witnessed a rise in loan balances in the reported quarter.
Navient Corporation’s (NAVI - Free Report) third-quarter 2022 adjusted core earnings per share of 75 cents missed the Zacks Consensus Estimate of 77 cents. Also, the bottom line was lower than the prior-year quarter’s 92 cents.
The results of Navient were affected by the fall in non-interest income and NII. An increase in the provision for loan losses also dragged the results. Nonetheless, lower expenses aided the company.