Capital One Q2 Earnings Miss On Higher Costs, Shares Fall
Shares of Capital One Financial Corporation (COF - Analyst Report) fell nearly 5% in the after-market trading session following the second-quarter 2015 earnings miss. The company reported adjusted earnings from continuing operations of $1.78 per share, which lagged the Zacks Consensus Estimate of $1.97. Moreover, earnings came in below the prior-year quarter figure of $2.04 per share.
Capital One Financial Corporation - Earnings Surprise | FindTheBest
Results were affected by a reduction in non-interest income and elevated expense level as well as provisions. Credit quality continued to reflect weakness. However, higher net interest income remained a headwind during the quarter.
The reported quarter results excluded the impact of restructuring charges of $147 million and a build in the U.K. PPI reserve of $78 million. After considering these non-recurring items, net income from continuing operations came in at $863 million or $1.50 per share.
Performance Details
Capital One’s net revenue totaled $5.67 billion, up 4% year over year. However, the figure missed the Zacks Consensus Estimate of $5.76 billion.
Net interest income climbed 5% year over year to $4.54 billion, mainly due to a 5% rise in total interest income, partly offset by 1% increase in interest expenses. Also, net interest margin inched up 1 basis points (bps) year over year to 6.56%.
Non-interest income declined 2% year over year to $1.14 billion on the back of lower service charges and other customer-related fees as well as other income. These were, however, partly offset by higher interchange fees.
Non-interest expenses rose 11% year over year to $3.31 billion. The increase was mainly attributable to a rise in salaries and associate benefit costs, marketing costs as well as professional services costs. Nevertheless, these were partially offset by a fall in amortization of intangibles and occupancy and equipment costs.
The efficiency ratio deteriorated to 58.30% from 54.48% in the year-ago quarter. A rise in efficiency ratio indicates lower profitability.
Credit Quality
Capital One’s credit quality worsened during the quarter. Net charge-off rate descended 3 bps year over year to 1.64%.
However, provision for credit losses surged 60% year over year to $1.13 billion. Also, the 30-plus day performing delinquency rate inched up 9 bps year over year to 2.33%. Moreover, allowance, as a percentage of reported loans held for investment, stood at 2.23%, up 22 bps from the prior-year quarter.
Capital and Profitability Ratios
Capital One’s profitability ratios and capital ratios weakened during the quarter. Return on average assets plunged 53 bps year over year to 1.11% as of Jun 30, 2015. Return on average common equity plummeted to 7.30% from 11.09% in the prior-year quarter.
As of Jun 30, 2015, Tier 1 risk-based capital ratio remained at par with the year-ago level at 13.3%. Moreover, total risk-based capital ratio stood at 15.1%, down from 15.4% as of Jun 30, 2014.
Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.1% as of Jun 30, 2015.
Our Viewpoint
We expect continued synergies from Capital One’s geographic diversification and its major acquisitions, namely HSBC Holdings plc’s (HSBC - Analyst Report) credit card business and ING Direct USA, the online banking unit of ING Groep NV (ING - Snapshot Report). Moreover, the resilience shown by most of the company’s businesses and a strong balance sheet will continue to support its financials going forward.
Nevertheless, elevated expenses, a still low rate environment and pressure on asset quality, along with the impact of new regulations, will continue to hamper the company’s bottom-line growth in the near term.
Currently, Capital One carries a Zacks Rank #3 (Hold).
Among other firms in the same sector, Sallie Mae (SLM - Analyst Report) reported second-quarter 2015 core earnings of 20 cents per share, significantly up from the year-ago quarter core earnings of 10 cents. Robust results came on the back of higher non-interest income that reflected a drastic rise in gains on sales of loans.
Stock is down almost 12%.
Disclosure: None.