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Capital One (COF) Stock Down 1% on Q1 Loss, Provisions Surge

Zacks Equity Research

Capital One’s COF shares fell almost 1% in the after-hour trading session, in response to first-quarter 2020 results. Adjusted loss was $3.02 per share against the Zacks Consensus Estimate of earnings of $2.56. The year-ago quarterly earnings were $2.90 per share.

The results reflect a drastic surge in provisions amid coronavirus-related mayhem. Further, decline in loan balance, rise in operating expenses and lower interest rates were headwinds. However, higher interest income and improvement in deposit balance offered some support.

After taking into consideration non-recurring items, net loss available to common shareholders was $1.42 billion or $3.10 per share versus net income of $1.35 billion or $2.86 per share in the prior-year quarter.

Revenues & Expenses Rise

Total net revenues were $7.25 billion, up 2% from the prior-year quarter. The figure missed the Zacks Consensus Estimate of $7.26 billion.

Net interest income grew 4% from the prior-year quarter to $6.03 billion. Net interest margin fell 8 basis points (bps) to 6.78% due to lower yields on interest-earning assets.

Non-interest income of $1.22 billion decreased 5% from the prior-year quarter. Lower service charges and other customer-related fees, and net interchange fees were the primary reasons for the decline.

Non-interest expenses of $3.73 billion were up 2% from the year-ago quarter, mainly owing to higher salaries and associate benefits costs, and occupancy and equipment costs.

Efficiency ratio was 51.44%, down from 51.83% in the year-ago quarter. A decrease in efficiency ratio indicates improvement in profitability.

As of Mar 31, 2020, loans held for investment were $263 billion, down 1% from the prior quarter. Total deposits, as of the same date, increased 3% sequentially to $269.7 billion.

Credit Quality Worsens

Provision for credit losses jumped significantly on a year-over-year basis to $5.42 billion.  The rise was largely due to economic uncertainty due to the coronavirus pandemic, and deterioration in the oil and gas industry.

Net charge-off rate increased 8 bps year over year to 2.72%. Also, allowance — as a percentage of reported loans held for investment — was 5.35%, up 231 bps.

However, the 30-plus day performing delinquency rate declined 28 bps to 2.95%.

Capital Ratios Improve

As of Mar 31, 2020, Tier 1 risk-based capital ratio was 13.7%, up from 13.4% in the comparable prior-year period. Further, common equity Tier 1 capital ratio was 12.0% as of Mar 31, 2020, up from 11.9% in the corresponding period of 2019.

Share Repurchase Update

During the first quarter, Capital One repurchased 3.7 million shares. In mid-March, the company suspended the share buyback plan through second-quarter 2020 amid coronavirus concerns.

Our Take

Capital One’s strategic acquisitions and steady improvement in the card business position it well for long-term growth. However, rise in credit costs, lower interest rates and elevated expenses remain major near-term concerns.

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 #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Consumer Loan Providers

Navient Corporation NAVI reported first-quarter 2020 adjusted core earnings per share of 51 cents that missed the Zacks Consensus Estimate of 72 cents. Also, the bottom line was lower than the year-ago reported figure of 58 cents.

Sallie Mae SLM reported first-quarter 2020 core earnings of 79 cents per share, lagging the Zacks Consensus Estimate of 88 cents. However, the figure compared favorably with 34 cents reported in the prior-year quarter.

Ally Financial’s ALLY first-quarter 2020 adjusted loss was 44 cents per share against the Zacks Consensus Estimate of earnings of 71 cents. The figure also deteriorated from the year-ago quarterly earnings of 80 cents per share.

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