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Capital One (COF) Tanks 5.3% on Q4 Earnings & Revenue Miss

Zacks Equity Research

Shares of Capital One COF declined 5.3% following the release of fourth-quarter 2018 results after the market closed. Adjusted earnings of $1.87 per share lagged the Zacks Consensus Estimate of $2.40. However, it compared favorably with the year-ago quarter’s adjusted earnings of $1.62.

Results benefited from rise in net interest income and strength in card business. Further, a decline in provision for credit losses and improving loans and deposits were the tailwinds. However, lower non-interest income and an increase in operating expenses hurt the results to some extent.

After taking into consideration the non-recurring items, net income available to common shareholders was $1.17 billion or $2.48 per share against net loss of $1.05 billion or $2.17 per share in the prior-year quarter.

Adjusted earnings of $10.88 per share for 2018 missed the Zacks Consensus Estimate of $11.73. Nonetheless, it was above the prior year’s adjusted earnings of $7.74. After considering non-recurring items, net income available to common shareholders was $5.71 billion or $11.82 per share, up from $1.70 billion or $3.49 per share in 2017.

Revenues Stable, Expenses Rise

Net revenues in the reported quarter were $7.01 billion, relatively stable year over year. The figure missed the Zacks Consensus Estimate of $7.07 billion.

For2018, net revenues grew 3% to $28.08 billion. It was in line with the Zacks Consensus Estimate.

Net interest income was relatively stable year over year at $5.82 billion. However, net interest margin decreased 7 basis points (bps) to 6.96%.

Non-interest income declined 1% year over year to $1.19 billion. The decrease was due to lower service charges and other customer-related fees, and other income and net securities losses, partially offset by rise in net interchange fees.

Non-interest expenses of $4.13 billion were up 9% year over year, mainly owing to 81% jump in marketing costs and 55% surge in professional services costs.

Efficiency ratio was 58.92% compared with 53.89% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.

Loan & Deposit Balances Improve

As of Dec 31, 2018, loans held for investment were $245.9 billion, up 3% from the prior quarter. Also, total deposits, as of the same date, increased 1% sequentially to $249.8 billion.

Credit Quality: A Mixed Bag

Net charge-off rate decreased 22 bps year over year to 2.67%. Also, provision for credit losses declined 15% to $1.64 billion. Likewise, allowance as a percentage of reported loans held for investment was 2.94%, up 1 bp.

However, the 30-plus day performing delinquency rate increased 39 bps year over year to 3.62%.

Profitability & Capital Ratios Improve

Return on average assets was 1.38% at the end of the reported quarter against negative 0.95% in the year-ago quarter. Also, return on average common equity was 10.05%against negative 8.14% in the prior-year quarter.

As of Dec 31, 2018, Tier 1 risk-based capital ratio was 12.7%, up from 11.8% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 11.2% as of Dec 31, 2018, up from 10.3% on Dec 31, 2017.

Our Take

Capital One’s strategic acquisitions over the years has positioned it well for long-term growth. Further, steady improvement in card business will likely support profitability. However, increasing expenses pose a concern. Also, asset quality is likely to remain under pressure due to losses in the auto portfolio and U.S. card business.

Capital One Financial Corporation Price, Consensus and EPS Surprise


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

Earnings Release Dates of Other Consumer Loan Stocks

Santander Consumer USA Holdings Inc. SC and Ally Financial Inc. ALLY will report results on Jan 30 while Credit Acceptance Corporation CACC is slated to announce on Feb 12.

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