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Capital One (COF) Falls on Q1 Earnings Miss, Provisions Up

Shares of Capital One Financial Corporation COF lost nearly 2% in the after-market trading session, following the release of its first-quarter 2016 results. Earnings from continuing operations of $1.85 per share lagged the Zacks Consensus Estimate of $1.90.


Lower-than-expected quarterly results were due to  higher expenses and provisions, partly offset by a rise in revenues. The quarter witnessed strong growth in the company’s Domestic Card business, both in loan balances and purchase volumes, which drove top-line growth.

Net income available to common stockholders came in at $970 million, down 13% year over year.


Net revenue totaled $6.22 billion, up 10% year over year. Moreover, the figure surpassed the Zacks Consensus Estimate of $6.10 billion.

Net interest income grew 10% year over year to $5.06 billion, driven by a 11% increase in total interest income, partly offset by a 16% rise in interest expenses. Also, net interest margin went up 18 basis points (bps) year over year to 6.75%.

Non-interest income improved 9% year over year to $1.16 billion. A rise in interchange fees and other revenues was, however, partially offset by lower service charges and other customer-related fees as well as net other-than-temporary impairment recognized in earnings.

Non-interest expenses rose 6% year over year to $3.22 billion. The increase was mainly due to a rise in all components except professional services and amortization of intangibles.

The efficiency ratio improved to 51.82% from 53.99% recorded in the year-ago quarter. A decrease in efficiency ratio indicates enhanced profitability.

Credit Quality

Capital One’s credit quality worsened during the quarter. Net charge-off rate rose 36 basis points (bps)year over year to 2.08%. Further, provision for credit losses surged 63% year over year to $1.53 billion.

Also, the 30-plus day performing delinquency rate increased 1 bps year over year to 2.33%. Likewise, allowance, as a percentage of reported loans held for investment, was 2.38%, up 22 bps year over year.

Capital and Profitability Ratios

Capital One’s profitability and capital ratios weakened during the quarter. Return on average assets declined 24 bps year over year to 1.23% as of Mar 31, 2016. Return on average common equity fell to 8.52% from 9.84% in the prior-year quarter.

As of Mar 31, 2016, Tier 1 risk-based capital ratio decreased 80 bps year over year to 12.4%. Further, total risk-based capital ratio was 14.6%, down from 15.1% as of Mar 31, 2015.

Moreover, common equity Tier 1 capital ratio under Basel III Standardized Approach was 11.1% as of Mar 31, 2016, down from 12.5% as of Mar 31, 2015.

Our Viewpoint

Capital One is expanding into the lucrative healthcare lending sector with the acquisition of General Electric Company’s GE healthcare-related loans as well as its Healthcare Financial Services business.

We expect steady synergies from Capital One’s geographic diversification and its major acquisitions, namely HSBC Holdings plc’s HSBC credit card business and ING Direct USA, the online banking unit of ING Groep NV ING. Also, the resilience shown by most of the company’s businesses and a strong balance sheet will continue to support its financials going forward.

Nevertheless, elevated expenses, a still low rate environment and pressure on asset quality, along with the impact of new regulations, will likely continue hampering the company’s bottom-line growth in the near term.

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

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