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Capital One (COF) Q1 Earnings Beat as NII Improves, Stock Down

Capital One’s COF first-quarter 2022 earnings of $5.62 per share easily outpaced the Zacks Consensus Estimate of $5.39. The bottom line, however, declined 20% from the year-ago quarter. The reported quarter included 35 cents per share of gain on the sale of the partnership card portfolio.

Results benefited from a decent improvement in loan balances, which supported net interest income (NII). Higher consumer confidence aided credit card business and non-interest income.

However, an increase in operating expenses was a headwind. During the quarter, the company recorded a provision for credit losses. Perhaps these were the primary reasons for investors’ bearish stance, as COF’s shares lost 2.1% in after-hours trading.

Net income available to common shareholders (GAAP basis) was $2.3 billion, plunging 28% from the prior-year quarter.

Revenues & Expenses Rise

Total net revenues were $8.17 billion, up 15% from the prior-year quarter. The top line also beat the Zacks Consensus Estimate of $8.02 billion.

NII improved 10% from the prior-year quarter to $6.4 billion.

Net interest margin surged 50 basis points (bps) to 6.49%. This was largely driven by lower card balances and a rise in average loan balances.

Non-interest income of $1.78 billion jumped 38%. This was primarily attributable to growth in net interchange fees (up 26%) and service charges and other customer-related fees (up 14%). Further, other non-interest income jumped significantly.

Non-interest expenses were $4.55 billion, rising 22%. The increase was mainly due to an 83% surge in marketing expenses.

Efficiency ratio was 55.68%, up from 52.58% in the year-ago quarter. A rise in efficiency ratio indicates deterioration in profitability.

As of Mar 31, 2022, loans held for investment were $280.5 billion, up 1% from the prior quarter. Total deposits, as of the same date, rose 1% to $313.4 billion.

Credit Quality: A Mixed Bag

Provision for credit losses was $677 million in the reported quarter compared with provision benefit of $823 million in the prior-year quarter. The 30-plus day performing delinquency rate rose 26 bps to 2.08%.

However, net charge-off rate decreased 10 bps year over year to 1.11%. Allowance, as a percentage of reported loans held for investment, was 4.03%, down 174 bps.

Capital Ratios Deteriorates

As of Mar 31, 2022, Tier 1 risk-based capital ratio was 14.1%, down from 16.2% a year ago. Common equity Tier 1 capital ratio was 12.7% as of Mar 31, 2022, down from 14.6%.

Share Repurchase Update

During the quarter, Capital One repurchased 16.7 million shares for $2.4 billion. This was part of the $5 billion buyback authorization announced in January.

Earlier this month, the company announced an additional $5 billion worth of share repurchase authorization, which will be effective from the third quarter of 2022.

Our View

Capital One’s strategic acquisitions, rise in demand for consumer loans and steady improvement in the card business position it well for long-term growth. However, mounting expenses remain a major near-term concern.

Capital One Financial Corporation Price, Consensus and EPS Surprise

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

Capital One Financial Corporation price-consensus-eps-surprise-chart | Capital One Financial Corporation Quote

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

Performance & Earnings Date Other Consumer Loan Providers

Ally Financial’s ALLY first-quarter 2022 adjusted earnings of $2.03 per share surpassed the Zacks Consensus Estimate of $1.93. The bottom line reflects a decline of 2.9% from the year-ago quarter.

ALLY’s results benefited primarily from an improvement in revenues, and higher loans and deposit balances. However, a rise in expenses, as well as higher provisions, hurt results to some extent.

Credit Acceptance Corporation CACC is slated to report first-quarter 2022 results on May 2.

Over the past 30 days, the Zacks Consensus Estimate for Credit Acceptance’s quarterly earnings has been stable at $13.13. This indicates an 11.1% increase from the prior-year quarter.

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