Capital One (COF) Up 3.4% On Q1 Earnings & Revenue Beat

Shares of Capital One (NYSE:COF) rallied 3.4% following the release of first-quarter 2019 results after the market closed. Adjusted earnings of $2.90 per share easily surpassed the Zacks Consensus Estimate of $2.68. Also, it compared favorably with the year-ago quarter’s adjusted earnings of $2.65.

Results benefited from rise in revenues, improving deposit balances and strength in card business. However, a rise in provision for credit losses, lower loan balances and an increase in operating expenses hurt the results to some extent.

After taking into consideration the non-recurring items, net income available to common shareholders was $1.35 billion or $2.86 per share, up from $1.28 billion or $2.62 per share in the prior-year quarter.

Revenues & Expenses Rise

Net revenues were $7.08 billion, up 3% year over year. The figure beat the Zacks Consensus Estimate of $7.01 billion.

Net interest income inched up 1%to $5.79 billion. However, net interest margin decreased 7 basis points (bps) to 6.86%.

Non-interest income increased 8% year over year to $1.29 billion. The rise was driven by highernet interchange fees, other income and net securities losses, partially offset by decline in service charges and other customer-related fees.

Non-interest expenses of $3.67 billion were up 3%, mainly owing to 25% jump in marketing costs and 39% surge in professional services costs.

Efficiency ratio was 51.83% compared with 51.72% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.

Loan Decline, Deposit Balances Improve

As of Mar 31, 2019, loans held for investment were $240.3 billion, down 2% from the prior quarter. However, total deposits, as of the same date, increased 2% sequentially to $255.11 billion.

Credit Quality: A Mixed Bag

Net charge-off rate increased 5 bps year over year to 2.64%. Also, provision for credit losses rose 1% to $1.69 billion. Likewise, the 30-plus day performing delinquency rate increased 51 bps year over year to 3.23%.

However, allowance as a percentage of reported loans held for investment was 3.04%, down 1 bp.

Strong Profitability & Capital Ratios

Return on average assets was 1.52% at the end of the reported quarter, up from 1.48% in the year-ago quarter. Also, return on average common equity was 11.13%, down from 11.47% in the prior-year quarter.

As of Mar 31, 2019, Tier 1 risk-based capital ratio was 13.4%, up from 12.0% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 11.9% as of Mar 31, 2019, up from 10.5% on Mar 31, 2018.

Our Take

Capital One’s strategic acquisitions over the years have positioned it well for long-term growth. Further, steady improvement in card business will likely support profitability. However, increasing expenses pose a concern. Also, asset quality is likely to remain under pressure due to losses in the auto portfolio and U.S. card business.

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.

Performance & Earnings Release Dates of Other Consumer Loan Stocks

Ally Financial Inc.’s (NYSE:ALLY) first-quarter 2019 adjusted earnings of 80 cents per share surpassed the Zacks Consensus Estimate of 79 cents. Further, the bottom line compared favorably with the prior-year quarter’s figure of 68 cents.

Credit Acceptance Corporation (NASDAQ:CACC) and Santander (MC:SAN) Consumer USA Holdings Inc. (NYSE:SC) are slated to announce on Apr 29 and Apr 30, respectively.

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