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Capital One (COF) Falls 1.9% on Q4 Earnings Miss, Costs Up

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Shares of 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 - 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 Financial Corporation Price, Consensus and EPS Surprise


Capital One Financial Corporation Price, Consensus and EPS Surprise | Capital One Financial Corporation Quote

Capital One carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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