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Capital One Beats Earnings, Revs Lag

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Capital One Financial Corp.’s (COF - Free Report) first-quarter 2013 earnings of $1.79 per share substantially surpassed the Zacks Consensus Estimate of $1.63. Also, this was nearly 27% above the prior-quarter earnings of $1.41.

Better-than-expected results benefited from a fall in operating expenses, partially offset by decline in revenues. Moreover, strong profitability as well as capital ratios and continuously improving asset quality were the other highlights of the quarter.

Net income from continuing operations for the first quarter came in at $1.14 billion or $1.92 per share compared with $848 million or $1.42 per share in the previous quarter.

Performance in Detail

Capital One’s net revenue for the reported quarter stood at $5.55 billion, down 1.3% sequentially. The fall was mainly due to lower average loan balances and purchase volume, which were partially offset by higher margins. Moreover, revenues were below the Zacks Consensus Estimate of $5.62 billion.

Net interest income for the quarter inched up about 1% from the previous quarter to $4.57 billion. Further, net interest margin increased 19 basis points (bps) sequentially to 6.71%, driven by the reduction in interest expenses and release of cash related to the redemption of trust preferred securities.

Non-interest income declined 10.5% from $1.10 billion in the last quarter to $981 million in the reported quarter. The fall was mainly driven by lower service charges and other customer-related fees as well as decline in interchange fees.

Capital One’s operating expenses dropped 7.0% from the prior quarter to $3.02 billion. The decrease was largely attributable to lower marketing expenses and acquisition-related costs, partially offset by higher salaries and associate benefits costs.

The managed efficiency ratio improved to 54.55% from 57.88% in the prior quarter. The fall in efficiency ratio indicates rise in profitability.

Credit Quality

Capital One’s credit quality showed improvement during the reported quarter. Net charge-off rate declined 6 bps sequentially to 2.20%. Similarly, the 30-plus day performing delinquency rate decreased 33 bps from the prior quarter to 2.37%.

Moreover, allowance, as a percentage of reported loans held for investment, came in at 2.41%, down 9 bps from 2.50% in the previous quarter. Additionally, provision for credit losses plunged 23.1% sequentially to $885 million.

Capital and Profitability Ratios

Capital One’s capital and profitability ratios continued to improve in the reported quarter. As of Mar 31, 2013, return on average assets improved to 1.51% from 1.10% as of Dec 31, 2012. Similarly, return on average common equity improved to 11.17% from 8.44% in the prior quarter.

As of Mar 31, 2013, tier 1 risk-based capital ratio came in at 12.2%, up from 11.3% as of Dec 31, 2012. Also, total risk-based capital ratio grew to 14.4% from 13.6% as of Dec 31, 2012.

Further, the company’s tangible book value per share was $41.87 as of Mar 31, 2013, up from $40.23 as of Dec 31, 2012.

Other Developments

In Feb 2013, Capital One signed an agreement to vend certain private label and co-branded credit card accounts to Citigroup, Inc. (C - Free Report) . These card portfolios – worth about $7 billion – are related to electronics retailer, Best Buy Co Inc.

Capital One stated that the agreement, still subject to customary closing conditions, is expected to be completed in the third quarter of 2013. Though the financial terms of the transaction were not disclosed, the company anticipates the deal to have a neutral impact on its earnings. Further, Capital One and Best Buy have agreed to terminate the contractual credit card relationship, which these companies share.

Our Viewpoint

We anticipate continued synergies from Capital One’s geographic diversification and 2 of its major acquisitions – HSBC Holdings plc’s credit card business and ING Direct USA, the online banking unit of ING Groep NV (ING - Free Report) . Moreover, the resilience shown by almost all its businesses will continue to support its financials. Nevertheless, exposures to commercial real estate, weak demand for loans and the impact of new financial regulations are expected to marginally dent the results in the near term.

Capital One currently carries a Zacks Rank #3 (Hold).

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