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Why Capital One (COF) Stock Fell Despite Q3 Earnings Beat

Published 10/25/2016, 09:58 PM
Updated 07/09/2023, 06:31 AM

Capital One Financial Corporation’s (NYSE:COF) third-quarter 2016 adjusted earnings of $2.03 per share surpassed the Zacks Consensus Estimate of $1.94. However, it compared unfavorably with the year-ago quarter’s adjusted earnings of $2.10.

Shares of Capital One fell nearly 2% in after-market trading. This perhaps reflected investors’ concerns regarding continued deterioration in the company’s asset quality.

Continued improvement in net interest income and non-interest income were the primary reasons for the better-than-expected results. This was partially offset by a rise in expenses and higher provision for credit losses.

After considering adjusting items, net income came in at $1.01 billion or $1.90 per share, down from $1.11 billion or $1.98 per share in the prior-year quarter.

Rise in Revenues Supported Results; Costs Rise

Net revenue totaled $6.46 billion, up 10% year over year. Moreover, the figure was above the Zacks Consensus Estimate of $6.36 billion.

Net interest income grew 11% from the prior-year quarter to $5.28 billion. Also, net interest margin increased 14 basis points (bps) year over year to 6.79%.

Non-interest income rose 4% year over year to $1.18 billion. The increase reflected a rise in interchange fees and other revenues, partially offset by lower service charges and other customer-related fees.

Non-interest expenses of $3.36 billion were up 6% from the year-ago quarter. Higher salaries and associate benefits costs, occupancy and equipment expenses, communications and data processing expenses, and other non-interest expense were largely responsible for increase in expenses.

Further, efficiency ratio improved to 52.02% from 53.56% recorded in the year-ago quarter. A decrease in efficiency ratio indicates enhanced profitability.

Worsening Credit Quality

Net charge-off rate rose 41 bps year over year to 2.10%. Further, provision for credit losses surged 45% from the year-ago quarter to $1.59 billion.

Also, the 30-plus day performing delinquency rate increased 8 bps year over year to 2.71%. Likewise, allowance, as a percentage of reported loans held for investment was 2.63%, up 36 bps year over year.

Profitability & Capital Ratios Weaken

Return on average assets of 1.18% as of Sep 30, 2016 was down from 1.43% as of Sep 30, 2015. Also, return on average common equity declined to 8.59% from 9.54% in the prior-year quarter.

As of Sep 30, 2016, Tier 1 risk-based capital ratio decreased to 12.0% from 13.4% as of Sep 30, 2015. Further, total risk-based capital ratio was 14.7%, down from 15.1% as of Sep 30, 2015.

Moreover, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.6% as of Sep 30, 2016, down from 12.1% as of Sep 30, 2015.

Our Viewpoint

Capital One continues to benefit from geographic diversification and inorganic growth strategy. Last year, the company 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. This, along with other two major acquisitions – 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) – have led to significant improvement in top line.

Nevertheless, elevated expense base, a persistent low-rate environment and pressure on asset quality, along with the impact of new regulations, will likely continue to hurt the company’s financials in the near term.

CAPITAL ONE FIN Price, Consensus and EPS Surprise

CAPITAL ONE FIN Price, Consensus and EPS Surprise | CAPITAL ONE FIN 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.

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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

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