Capital One Q2 Earnings Miss on Higher Costs, Shares Fall - Analyst Blog
Shares of Capital One Financial Corporation COF fell nearly 5% in the after-market trading session following the second-quarter 2015 earnings miss. The company reported adjusted earnings from continuing operations of $1.78 per share, which lagged the Zacks Consensus Estimate of $1.97. Moreover, earnings came in below the prior-year quarter figure of $2.04 per share.
Capital One Financial Corporation - Earnings Surprise | FindTheBest
Results were affected by a reduction in non-interest income and elevated expense level as well as provisions. Credit quality continued to reflect weakness. However, higher net interest income remained a headwind during the quarter.
The reported quarter results excluded the impact of restructuring charges of $147 million and a build in the U.K. PPI reserve of $78 million. After considering these non-recurring items, net income from continuing operations came in at $863 million or $1.50 per share.
Performance Details
Capital One’s net revenue totaled $5.67 billion, up 4% year over year. However, the figure missed the Zacks Consensus Estimate of $5.76 billion.
Net interest income climbed 5% year over year to $4.54 billion, mainly due to a 5% rise in total interest income, partly offset by 1% increase in interest expenses. Also, net interest margin inched up 1 basis points (bps) year over year to 6.56%.
Non-interest income declined 2% year over year to $1.14 billion on the back of lower service charges and other customer-related fees as well as other income. These were, however, partly offset by higher interchange fees.
Non-interest expenses rose 11% year over year to $3.31 billion. The increase was mainly attributable to a rise in salaries and associate benefit costs, marketing costs as well as professional services costs. Nevertheless, these were partially offset by a fall in amortization of intangibles and occupancy and equipment costs.
The efficiency ratio deteriorated to 58.30% from 54.48% in the year-ago quarter. A rise in efficiency ratio indicates lower profitability.
Credit Quality
Capital One’s credit quality worsened during the quarter. Net charge-off rate descended 3 bps year over year to 1.64%.
However, provision for credit losses surged 60% year over year to $1.13 billion. Also, the 30-plus day performing delinquency rate inched up 9 bps year over year to 2.33%. Moreover, allowance, as a percentage of reported loans held for investment, stood at 2.23%, up 22 bps from the prior-year quarter.
Capital and Profitability Ratios
Capital One’s profitability ratios and capital ratios weakened during the quarter. Return on average assets plunged 53 bps year over year to 1.11% as of Jun 30, 2015. Return on average common equity plummeted to 7.30% from 11.09% in the prior-year quarter.
As of Jun 30, 2015, Tier 1 risk-based capital ratio remained at par with the year-ago level at 13.3%. Moreover, total risk-based capital ratio stood at 15.1%, down from 15.4% as of Jun 30, 2014.
Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.1% as of Jun 30, 2015.
Our Viewpoint
We expect 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 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 continue to hamper the company’s bottom-line growth in the near term.
Currently, Capital One carries a Zacks Rank #3 (Hold).
Among other firms in the same sector, Sallie Mae SLM reported second-quarter 2015 core earnings of 20 cents per share, significantly up from the year-ago quarter core earnings of 10 cents. Robust results came on the back of higher non-interest income that reflected a drastic rise in gains on sales of loans.
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