Capital One (COF) Up 1.4% On Q2 Earnings & Revenue Beat

Shares of Capital One (NYSE:COF) rallied 1.4% following the release of second-quarter 2019 results after the market closed. Adjusted earnings of $3.37 per share easily surpassed the Zacks Consensus Estimate of $2.84. Also, it compared favorably with the year-ago quarter’s adjusted earnings of $3.22.

Results benefited from rise in net interest income, improving loan balances and strength in card business. However, a rise in provision for credit losses, lower non-interest income and higher operating expenses were the undermining factors.

After taking into consideration non-recurring items, net income available to common shareholders was $1.53 billion or $3.24 per share, down from $1.81 billion or $3.71 per share in the prior-year quarter.

Revenues Down, Expenses Rise

Net revenues were $7.12 billion, down 1% year over year. However, the figure beat the Zacks Consensus Estimate of $7.00 billion.

Net interest income grew 4% to $5.75 billion. Also, net interest margin increased 14 basis points (bps) to 6.80%.

Non-interest income of $1.38 billion declined 16% from the prior-year quarter. Lower service charges and other customer-related fees, and other income led to the fall.

Non-interest expenses of $3.78 billion were up 10%, mainly owing to 28% jump in marketing costs and 34% surge in professional services costs.

Efficiency ratio was 53.05% compared with 47.61% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.

As of Jun 30, 2019, loans held for investment were $244.5 billion, up 2% from the prior quarter. Total deposits, as of the same date, were relatively stable sequentially at $254.5 billion.

Credit Quality: A Mixed Bag

Net charge-off rate increased 6 bps year over year to 2.48%. Also, provision for credit losses rose 5% to $1.34 billion. Likewise, the 30-plus day performing delinquency rate increased 27 bps to 3.15%.

However, allowance as a percentage of reported loans held for investment was 2.92%, down 20 bps.

Profitability Ratios Decline, Capital Ratios Improve

Return on average assets was 1.74% at the end of the reported quarter, down from 2.11% in the year-ago quarter. Also, return on average common equity was 12.14%, down from 16.06% in the prior-year quarter.

As of Jun 30, 2019, Tier 1 risk-based capital ratio was 13.8%, up from 12.6% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.3% as of Jun 30, 2019, up from 11.1% on Jun 30, 2018.

Our Take

Capital One’s strategic acquisitions over the years have positioned it well for long-term growth. While rise in credit costs and elevated expenses remain major near-term concerns, steady improvement in card business (leading to rise in interchange fees) will likely aid profitability.

Currently, Capital One carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance & Earnings Release Dates of Other Consumer Loan Stocks

Ally Financial’s (NYSE:ALLY) second-quarter 2019 adjusted earnings of 97 cents per share surpassed the Zacks Consensus Estimate of 88 cents. Further, the bottom line compared favorably with the prior-year quarter’s earnings of 83 cents.

Navient Corporation (NASDAQ:NAVI) and Discover Financial Services (NYSE:DFS) are slated to report on Jul 23.

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