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Capital One (COF) Falls on Q4 Earnings Miss as Provisions Rise

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Shares of Capital One (COF - Free Report) lost 1.3% in after-hours trading in response to lower-than-expected fourth-quarter 2023 results. Quarterly adjusted earnings of $2.24 per share lagged the Zacks Consensus Estimate of $2.50. Also, the bottom line fell 21% from the year-ago quarter.

Results were adversely impacted by higher provisions, increasing deposit costs and a rise in non-interest expenses. However, an increase in net interest income (NII) and higher loan balance offered support. Further, higher fee income on the back of robust credit card performance acted as a tailwind.

The results excluded certain one-item charges. After considering these, net income available to common shareholders was $639 million, plunging 45% from the prior-year quarter. Our estimate for the metric was $1804.9.

For 2023, adjusted earnings were $12.52 per share, missing the Zacks Consensus Estimate of $12.78 and down 29% year over year. Net income available to common shareholders (GAAP) was $4.58 billion, declining 35%.

Revenues Improve, Expenses Rise

Total net revenues for the reported quarter were $9.51 billion, up 5% from the prior-year quarter. The top line beat the Zacks Consensus Estimate of $9.45 billion.

For 2023, total net revenues grew 7% to $36.79 billion. The top line also surpassed the consensus estimate of $36.73 billion.

NII improved 4% to $7.52 billion. NIM declined 11 basis points (bps) to 6.73% as higher rates paid on interest-bearing deposits were partly offset by higher asset yields and growth in the credit card loan portfolio. Our estimates for NII and NIM were $7.25 billion and 6.32%, respectively.

Non-interest income of $2 billion increased 8%. The rise was driven by an increase in net interchange fees, service charges and other customer-related fees and other income. Our estimate for non-interest income was $2.01 billion.

Non-interest expenses were $5.72 billion, up 13%. Adjusted expenses increased 5% to $5.43 billion. The rise was mainly due to higher marketing costs and occupancy and equipment costs. We expected the metric to be $5.57 billion.

The efficiency ratio was 60.14%, up from 56.19% in the year-ago quarter. A rise in the efficiency ratio indicates a deteriorationin profitability.

As of Dec 31, 2023, loans held for investment were $320.5 billion, up 2% from the prior-quarter end. Total deposits were $348.4 billion, which rose 1%.

Credit Quality Worsens

Provision for credit losses was $2.86 billion in the reported quarter, rising 18% from the prior-year quarter. We had anticipated provisions of $2.60 billion.

The 30-plus-day-performing delinquency rate rose 75 bps year over year to 3.71%. Also, the net charge-off rate jumped 1352 bps to 3.21%. Allowance, as a percentage of reported loans held for investment, was 4.77%, up 53 bps year over year.

Capital Ratios Improve, Profitability Ratios Deteriorate

As of Dec 31, 2023, the Tier 1 risk-based capital ratio was 14.2%, up from 13.9% a year ago. The common equity Tier 1 capital ratio was 12.9%, improving from 12.5%.

At the end of the fourth quarter, the return on average assets was 0.60%, down from 1.10% in the year-ago period. Return on average common equity was 5.03%, rising from 9.76%.

Share Repurchase

During the reported quarter, Capital One repurchased 1.4 million shares for $150 million.

Our View

Capital One’s strategic acquisitions, decent demand for consumer loans, higher rates and steady improvement in the card business position it well for long-term growth. However, elevated expenses and a deteriorating macroeconomic backdrop are major near-term concerns.

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 of Other Consumer Loan Stocks

Ally Financial’s (ALLY - Free Report) fourth-quarter 2023 adjusted earnings of 45 cents per share surpassed the Zacks Consensus Estimate by a penny. However, the bottom line reflects a decline of 58.3% from the year-ago quarter.

ALLY’s results were primarily aided by an improvement in other revenues. However, a decline in net financing revenues and higher expenses and provisions were the undermining factors.

Sallie Mae’s (SLM - Free Report) , formally SLM Corporation, fourth-quarter 2023 core earnings per share of 72 cents missed the Zacks Consensus Estimate of 87 cents. The bottom line, however, compared favorably with the prior-year quarter’s loss of 33 cents.

A rise in non-interest expenses impeded the results. Nonetheless, lower provisions for credit losses, an increase in NII, robust loan originations and higher non-interest income were positives for SLM.

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