Shares of Capital One Financial Corporation COF rose nearly 4% in the after-market trading session following the release of its third-quarter 2015 results. Reported earnings from continuing operations of $1.99 per share conveniently outpaced the Zacks Consensus Estimate of $1.92. Also, the figure came in above the prior-year quarter tally of $1.94 per share.
Better-than-expected results were driven by a rise in net interest income and stable non-interest income. Specifically, improved top line in the Credit Card segment acted as a major tailwind. However, higher operating expenses and a surge in provision for loan losses continued to act as undermining factors.
Results included the impact of a build in the U.K. Payment Protection Insurance customer refund reserve of $69 million. Excluding this, net income was $1.18 billion or $2.10 per share.
Details
Capital One’s net revenue totaled $5.90 billion, up 5% year over year. Moreover, the figure surpassed the Zacks Consensus Estimate of $5.86 billion.
Net interest income grew 6% year over year to $4.76 billion, driven by a 6% rise in total interest income, partly offset by a 4% increase in interest expenses. Also, net interest margin rose 4 basis points (bps) year over year to 6.73%.
Non-interest income stood stable on a year over year basis at $1.14 billion. Lower service charges and other customer-related fees as well as net other-than-temporary impairment recognized in earnings were offset by a rise in interchange fees and other revenues.
Non-interest expenses rose 6% year over year to $3.16 billion. The increase was mainly due to an increase in all components except amortization of intangibles.
The efficiency ratio deteriorated to 53.56% from 62.93% recorded in the year-ago quarter. A rise in efficiency ratio indicates lower profitability.
Credit Quality
Capital One’s credit quality worsened during the quarter. Net charge-off rate rose 17 bps year over year to 1.69%. Further, provision for credit losses surged 10% year over year to $1.09 billion.
Also, the 30-plus day performing delinquency rate increased 17 bps year over year to 2.63%. Likewise, allowance, as a percentage of reported loans held for investment, was 2.27%, up 18 bps year over year.
Capital and Profitability Ratios
Capital One’s profitability and capital ratios weakened during the quarter. Return on average assets declined 8 bps year over year to 1.43% as of Sep 30, 2015. Return on average common equity fell to 9.54% from 10.12% in the prior-year quarter.
As of Sep 30, 2015, Tier 1 risk-based capital ratio increased 10 bps year over year to 13.4%. However, total risk-based capital ratio was 15.1%, down from 15.2% as of Sep 30, 2014.
Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.1% as of Sep 30, 2015.
Our Viewpoint
Capital One is expanding into lucrative healthcare lending sector. During the reported quarter, the company announced an agreement with General Electric Company GE to acquire roughly $8.5 billion of healthcare-related loans as well as the latter’s Healthcare Financial Services (“HFS”) business.
We expect to witness steady 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. Also, the resilience shown by most of the company’s businesses and a strong balance sheet will continue to support its financials, going forward.
Nevertheless, elevated expenses, a still low rate environment and pressure on asset quality, along with the impact of new regulations, will continue to hamper the company’s bottom-line growth in the near term.
Currently, Capital One carries a Zacks Rank #3 (Hold).
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