Lower expenses drove Capital One Financial Corp.’s (COF) third quarter 2014 earnings of $1.86 per share, up 1% from $1.84 earned in the prior-year quarter. Further, earnings from continuing operations of $1.94 per share beat the Zacks Consensus Estimate of $1.92 per share.
Results benefited from higher non-interest income and a fall in operating expenses. However, these were partly offset by a rise in provision for credit losses and lower net interest income. Further, while credit quality and capital ratios continued to improve, profitability ratios deteriorated.
Net income from continuing operations came in at $1.13 billion, increasing 1% year-over-year.
Performance Details
Capital One’s net revenue was $5.64 billion, almost at par on a year over year basis. Further, the figure beat the Zacks Consensus Estimate of $5.54 billion.
Net interest income fell 1% from the prior-year quarter to $4.50 billion, mainly due to a 2% decline in total interest income, partially offset by 11% decrease in interest expenses. Also, net interest margin declined 20 basis points (bps) year over year to 6.69%.
Non-interest income increased 5% year over year to $1.14 billion on the back of higher other income, interchange fees and lower net other-than-temporary impairment losses. These were, however, partly offset by a decrease in service charges and other customer-related fees.
Non-interest expenses declined 4% from the prior-year quarter to $3.00 billion. The slip was mainly attributable to a fall in communications and data processing costs, amortization of intangibles, salaries and associate benefits costs and other expenses. Nevertheless, these were partially offset by a rise occupancy and equipment expenses as well as marketing costs.
The efficiency ratio improved to 52.93% from 55.02% in the year-ago quarter. A fall in efficiency ratio indicates rise in profitability.
Credit Quality
Capital One’s credit quality depicted a mixed bag. Provision for credit losses increased 17% year over year to $993 million.
However, net charge-off rate declined 40 bps from the prior-year quarter to 1.52%. Also, the 30-plus day performing delinquency rate fell 8 bps from the year-ago quarter to 2.46%. Moreover, allowance, as a percentage of reported loans held for investment, came in at 2.09%, down 17 bps from the prior-year quarter.
Capital and Profitability Ratios
Capital One’s profitability ratios deteriorated during the quarter. As of Sep 30, 2014, return on average assets edged down to 1.50% from 1.52% as of Sep 30, 2013. Return on average common equity declined to 10.12% from 10.91% in the prior-year quarter.
Nevertheless, the company’s capital ratios continued to improve. As of Sep 30, 2014, Tier 1 risk-based capital ratio came in at 13.3%, up from 13.1% as of Sep 30, 2013. Moreover, total risk-based capital ratio was 15.2%, in line with the prior-year quarter level.
Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.7% as of Sep 30, 2014.
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 will continue to support its financials, going forward.
Nonetheless, exposure to commercial real estate, a weak loan demand and impact of new financial regulations are expected to affect results in the near term.
Currently, Capital One carries a Zacks Rank #2 (Buy).
Among other firms in the same sector, SLM Corporation (SLM) is slated to report results on Oct 22.
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