Shares of Capital One Financial Corporation (NYSE:COF) lost nearly 3% in the after-market trading, following the release of its second-quarter 2016 results. Adjusted earnings of $1.76 per share lagged the Zacks Consensus Estimate of $1.86. Further, it compared unfavorably with the year-ago quarter adjusted earnings of $1.78.
Continued rise in provisions was the primary reason for the lower-than-expected results. This was partially offset by improved revenue growth and stable expenses.
After considering adjusting items, net income came in at $942 million or $1.69 per share, up from $863 million or $1.50 per share in the prior-year quarter.
Rise in Revenues & Stable Cost Base Supported Results
Net revenue totaled $6.25 billion, up 10% year over year. Moreover, the figure was in line with the Zacks Consensus Estimate.
Net interest income grew 12% from the prior-year quarter to $5.09 billion. Also, net interest margin went up 17 basis points (bps) year over year to 6.73%.
Non-interest income rose 2% year over year to $1.16 billion. A rise in interchange fees and other revenues along with lower net other-than-temporary impairment recognized in earnings was, however, partially offset by lower service charges and other customer-related fees.
Non-interest expenses were $3.30 billion, relatively stable with the year-ago quarter. Further, efficiency ratio improved to 52.69% from 58.30% recorded in the year-ago quarter. A decrease in efficiency ratio indicates enhanced profitability.
Worsening Credit Quality
Net charge-off rate rose 37 bps year over year to 2.01%. Further, provision for credit losses surged 41% from the year-ago quarter to $1.59 billion.
Also, the 30-plus day performing delinquency rate increased 14 bps year over year to 2.47%. Likewise, allowance, as a percentage of reported loans held for investment was 2.51%, up 28 bps year over year.
Profitability Ratios Improve; Capital Ratios Weaken
Return on average assets increased 2 bps year over year to 1.13% as of Jun 30, 2016. Return on average common equity grew to 7.64% from 7.30% in the prior-year quarter.
As of Jun 30, 2016, Tier 1 risk-based capital ratio decreased 110 bps year over year to 12.2%. Further, total risk-based capital ratio was 14.4%, down from 15.1% as of Jun 30, 2015.
Moreover, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.9% as of Jun 30, 2016, down from 12.1% as of Jun 30, 2015.
Our Viewpoint
Capital One has expanded into the lucrative healthcare lending sector with the acquisition of General Electric Company’s (NYSE:GE) healthcare-related loans as well as its Healthcare Financial Services business. We expect steady synergies from Capital One’s geographic diversification and its major acquisitions, namely HSBC Holdings (LON:HSBA) plc’s (NYSE:HSBC) credit card business and ING Direct USA, the online banking unit of ING Groep NV (NYSE:ING) .
Nevertheless, elevated expense base, a still low rate environment and pressure on asset quality, along with the impact of new regulations, will likely continue hampering the company’s bottom-line growth in the near term.
Currently, Capital One carries a Zacks Rank #3 (Hold).
GENL ELECTRIC (GE): Free Stock Analysis Report
CAPITAL ONE FIN (COF): Free Stock Analysis Report
ING GROEP-ADR (ING): Free Stock Analysis Report
HSBC HOLDINGS (HSBC): Free Stock Analysis Report
Original post
Zacks Investment Research