Lower credit cost and growth in fee income drove Capital One Financial Corp.’s (COF) second-quarter 2014 earnings of $2.04 per share, which surpassed the Zacks Consensus Estimate by 14%. Further, the figure was up 10% from $1.85 earned in the prior-year quarter.
Our quantitative model had also conclusively projected that Capital One would beat the Zacks Consensus Estimate, as it had the right combination of two key components – a positive Earnings ESP and a Zacks Rank #2 (Buy).
Better-than-expected results were largely attributable to growth in fee income, lower provision for credit losses and decline in operating expenses, partially offset by lower net interest income. Moreover, credit quality and capital ratios continued to improve, while profitability ratios deteriorated.
Net income from continuing operations came in at $1.20 billion or $2.06 per share compared with $1.23 billion or $2.05 per share recorded in the year-ago quarter.
Capital One’s net revenue was $5.47 billion, down 3% year over year. However, the figure beat the Zacks Consensus Estimate of $5.43 billion.
Net interest income fell 5% from the prior-year quarter to $4.32 billion, mainly due to a 6% decline in total interest income. Also, net interest margin declined 28 basis points (bps) year over year to 6.55%.
Non-interest income increased 6% year over year to $1.15 billion on the back of higher other income, interchange fees and lower net other-than-temporary impairment losses. These were, however, partly offset by a decrease in service charges and other customer-related fees.
Non-interest expenses declined 1% from the prior-year quarter to $2.98 billion. The decrease was mainly attributable to fall in communications and data processing costs, amortization of intangibles and other expenses. Nevertheless, these were partially offset by a rise in salaries and associate benefits costs as well as occupancy and equipment expenses.
The efficiency ratio deteriorated to 54.48% from 53.53% in the prior-year quarter. A rise in efficiency ratio indicates decline in profitability.
Capital One’s credit quality showed improvement, with provision for credit losses declining 8% year over year to $704 million. Further, net charge-off rate decreased 36 bps year over year to 1.67%.
Moreover, the 30-plus day performing delinquency rate fell 11 bps from the year-ago quarter to 2.24%. Additionally, allowance, as a percentage of reported loans held for investment, came in at 2.01%, down 29 bps from the prior-year quarter.
Capital and Profitability Ratios
Capital One’s profitability ratios deteriorated during the quarter. As of Jun 30, 2014, return on average assets fell to 1.63% from 1.65% as of Jun 30, 2013. Return on average common equity declined to 11.09% from 11.91% in the prior-year quarter.
Nevertheless, the company’s capital ratios continued to improve. As of Jun 30, 2014, Tier 1 risk-based capital ratio came in at 13.3%, up from 12.4% as of Jun 30, 2013. Moreover, total risk-based capital ratio grew to 15.4% from 14.6% as of Jun 30, 2013.
Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.7% as of Jun 30, 2014.
We anticipate continued 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). Moreover, the resilience shown by most of the company’s businesses will continue to support its financials, going forward.
Nonetheless, exposure to commercial real estate, a weak loan demand and impact of new financial regulations are expected to affect results in the near term.
Among other card-servicing stocks, Discover Financial Services (DFS) is expected to report on Jul 22.