Capital One Financial Corp.’s (COF) first quarter 2011 earnings from continuing operations of $ 2.24 per share were substantially ahead of the Zacks Consensus Estimate of $ 1.53. This also compares favorably with $ 1.53 in the prior quarter and $ 1.58 in the year-ago quarter.
Better-than-expected results for the quarter were primarily from increased revenues and a lower provision for loan losses due to improved credit performance. Additionally, the company capital and profitability ratios also improved. However, an increase in operating expenses was a downside.
Total revenue for the reported quarter came in at $ 4.1 billion, up 3.0% sequentially but down 4.8% year over year. The increase in total revenue reflected increasing margins and relatively stable average loans. Total revenue also outpaced the Zacks Consensus Estimate of $ 3.9 billion.
Capital One’s net income from continuing operations was $ 1,031 million, up 47.2% from $ 701 million in the prior quarter and 43.3% from $ 720 million in the year-ago quarter. Adjusting the loss from discontinued operations, Capital One’s net income came in at $ 1,016 million or $ 2.21 per share, compared with $ 697 million or $ 1.52 per share in the earlier quarter and $ 636 million or $ 1.40 per share in the year-ago quarter.
Quarter in Detail
Net interest income increased 3.9% sequentially but fell 2.7% year over year to $ 3.14 billion. Non-interest income increased 0.4% sequentially but fell 11.3% year over year to $ 942 million.
Net interest margin (NIM) improved 29 basis points (bps) sequentially and 14 bps on a year-over-year basis to 7.24%. The hike was driven by driven by higher asset yields in the company’s Card and Auto businesses and decrease in cost of funds.
Capital One’s operating expenses for the reported quarter inched up 5.8% sequentially and 13.1% year over year to $ 1.9 billion. The increase was mainly due to rise in salaries and associate benefits expenses.
The managed efficiency ratio deteriorated to 52.96% from 52.78% in the prior quarter and 43.06% in the prior-year quarter. The increase in efficiency ratio indicates deterioration in profitability.
Credit Quality
Capital One’s credit quality continued to improve during the quarter. Allowance as a percentage of reported loans held for investment decreased 39 bps sequentially to 4.08%. Also, the net charge-off rate dropped 79 bps sequentially to 3.66%. The 30-plus day performing delinquency rate fell 49 bps sequentially to 3.11%.
Similarly, provision for loan and lease losses declined 36.4% sequentially and 63.9% year over year to $ 534 million. The decrease was driven by lower charge-offs in the reported quarter.
Capital and Profitability Ratios
Capital One’s capital and profitability ratios continued to enhance during the quarter. Tangible common equity (TCE) ratio for the quarter improved to 7.3% from 6.9% in the prior quarter. Though, Tier 1 risk-based capital ratio dipped 70 bps sequentially to 10.9%, it continues to stay above the regulatory well-capitalized minimum.
The company’s tangible book value per share was $ 29.70 as of March 31, 2011, compared with $ 27.73 as of December 31, 2010 and $ 22.86 as of March 31, 2010.
Peer Performance
Capital One’s peer company SLM Corporation (SLM) reported first quarter 2011 core earnings of 48 cents per share beating the Zacks Consensus Estimate of 41 cents. Favorable results were primarily driven by a decrease in loan loss provisions, increased net interest income and gains from repurchasing debt. The company also announced its first common stock dividend since 2007 and a $ 300 million share repurchase program
Our Viewpoint
We anticipate continued synergies from Capital One’s geographic diversification. Additionally, the resilience of almost all its businesses will continue to support the company’s financials. However, its commercial real estate exposure will remain a drag. Also, weak loan demand and the impact of the financial reform law will restrict earnings in the near future.
Capital One currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we also maintain a long-term “Neutral” recommendation on the shares.
CAPITAL ONE FIN (COF): Free Stock Analysis Report
SLM CORP (SLM): Free Stock Analysis Report
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