Capital One COF declined 1.9% in after-market trading following the release of fourth-quarter 2017 results. Adjusted earnings of $1.62 per share lagged the Zacks Consensus Estimate of $1.83. However, it compared favorably with the year-ago quarter’s earnings of $1.58. Results benefited from a rise in revenues and easing margin pressure. Also, the quarter witnessed a rise in loan and deposit balances. However, increase in provisions and expenses were the undermining factors. After taking into consideration charges related the tax act and other non-recurring items, net loss for the quarter was $971 million or $2.17 per share. This compared unfavorably with prior-year quarter’s net income of $791 million or $1.45 per share. For 2017, adjusted earnings per share of $7.74 surpassed the Zacks Consensus Estimate of $7.47 and were up 7% year over year. After considering several notable one-time items, net income was $1.98 billion or $3.49 per share, down from $3.75 billion or $6.89 per share in 2016. Revenue Growth Supports Results Net revenues were $7.01 billion, up 7% from the prior-year quarter. However, the figure missed the Zacks Consensus Estimate of $7.12 billion. For 2017, net revenues grew 7% year over year to $27.24 billion. However, it lagged the Zacks Consensus Estimate of $27.37 billion. Net interest income increased 7% from the prior-year quarter to $5.81 billion. Also, net interest margin increased 18 basis points (bps) year over year to 7.03%. Non-interest income increased 7% year over year to $1.2 billion. The increase was mainly driven by a rise in net interchange fees, partially offset by a decline in other income, and service charges and other customer-related fees. Non-interest expenses of $3.78 billion increased 3% from the year-ago quarter. All cost components, except amortization of intangibles, occupancy and equipment, marketing and professional services, rose year over year. Efficiency ratio came in at 53.89% compared with 56.03% in the year-ago quarter. A decrease in efficiency ratio indicates improved profitability. Credit Quality Worsens Net charge-off rate surged 41 bps year over year to 2.89%. Further, provision for credit losses rose 10% from the year-ago quarter to $1.93 billion. Also, the 30-plus day performing delinquency rate jumped 30 bps year over year to 3.23%. Likewise, allowance, as a percentage of reported loans held for investment was 2.95%, up 30 bps year over year. Strong Balance Sheet As of Dec 31, 2017, loans held for investment were $254.47 billion, up 1% from the prior quarter. Total deposits, as of the same date, increased 2% sequentially to $243.7 billion. Total stockholder’s equity was $48.73 billion as of Dec 31, 2017, a decline of 3% from the previous quarter. Profitability Ratios Deteriorate, Capital Ratios Improve Return on average assets was negative 0.95% at the end of the reported quarter against 0.91% in the year-ago quarter. Also, return on average common equity was negative 8.14% against 6.48% in the prior-year quarter. As of Dec 31, 2017, Tier 1 risk-based capital ratio was 11.8%, up from 11.6% in the prior-year quarter. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.3% as of Dec 31, 2017, up from 10.1% as of Dec 31, 2016. Our Take Capital One’s strategic acquisitions over the years position it well for long-term growth. These buyouts include Cabela’s Incorporated’s credit card portfolio, General Electric Company’s GE healthcare-related loans and its Healthcare Financial Services business, HSBC Holdings plc’s HSBC credit card business and ING Direct USA, the online banking unit of ING Groep NV ( ING Quick Quote ING - Free Report) . 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 remaining under pressure due to losses in the auto portfolio and U.S. card business.
Capital One carries a Zacks Rank #3 (Hold). You can see
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