Capital One (COF) Beats On Q1 Earnings As Revenues Improve

Capital One Financial Corporation’s (NYSE:COF) first-quarter 2018 adjusted earnings of $2.65 per share surpassed the Zacks Consensus Estimate of $2.34. Also, it compared favorably with the year-ago quarter’s adjusted earnings of $1.75.

Results benefited from rise in revenues and easing margin pressure. While majority of the credit quality metrics worsened during the quarter, a decline in provision for credit losses was a positive. Yet, an increase in expenses was the undermining factor.

After taking into consideration the non-recurring items, net income available to common shareholders for the quarter was $1.28 billion or $2.62 per share, up from $752 million or $1.54 per share in the prior-year quarter.

Revenue Growth Offsets Rise in Costs

Net revenues were $6.91 billion, up nearly 6% from the prior-year quarter. However, the figure marginally missed the Zacks Consensus Estimate of $6.95 billion.

Net interest income increased 4% from the prior-year quarter to $5.72 billion. Also, net interest margin increased 5 basis points (bps) year over year to 6.93%.

Non-interest income increased 12% year over year to $1.19 billion. The increase was mainly driven by rise in net interchange fees, and service charges and other customer-related fees.

Non-interest expenses of $3.57 billion increased 4% from the year-ago quarter. All cost components, except amortization of intangibles and professional services costs, rose year over year.

Efficiency ratio was 51.72% compared with 52.55% in the year-ago quarter. A decrease in efficiency ratio indicates improved profitability.

Credit Quality: Mixed Bag

Net charge-off rate increased 9 bps year over year to 2.59%. Also, the 30-plus day performing delinquency rate increased 11 bps year over year to 2.72%. Likewise, allowance as a percentage of reported loans held for investment was 3.05%, up 15 bps year over year.

However, provision for credit losses declined 16% from the year-ago quarter to $1.67 billion.

Solid Balance Sheet

As of Mar 31, 2018, loans held for investment were $248.26 billion, down 2% from the prior quarter. However, total deposits, as of the same date, increased 3% sequentially to $250.85 billion.

Total stockholder’s equity was $49.20 billion as of Mar 31, 2018, marking a rise of 1% from the previous quarter.

Profitability & Capital Ratios Improve

Return on average assets was 1.48% at the end of the reported quarter, up from 0.90% in the year-ago quarter. Also, return on average common equity was 11.47%, up from 6.73% in the prior-year quarter.

As of Mar 31, 2018, Tier 1 risk-based capital ratio was 12.0%, in line with the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.5% as of Mar 31, 2018, up from 10.4% as of Mar 31, 2017.

Our Take

Capital One’s strategic acquisitions over years position it well for long-term growth. These buyouts include Cabela’s Incorporated’s credit card portfolio, General Electric Company’s (NYSE:GE) healthcare-related loans and Healthcare Financial Services business, 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) .

However, increasing expenses continue to hurt Capital One's profitability. Also, deteriorating credit quality remains a major near-term concern. In fact, asset quality is likely to continue remaining under pressure due to losses in the auto portfolio and U.S. card business.

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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