Capital One Financial Corp
's. (
COF
) second-quarter 2012 adjusted earnings of $1.26 per share were
lower than the Zacks Consensus Estimate of $1.35. This excluded the
impact stemming from the acquisition of
HSBC Holdings plc
's (
HBC
) credit card business, which was completed in May, this year.
Higher net interest income, better asset quality and robust capital
ratios were the positives for the quarter. However, the declining
non-interest income and escalating operating costs were the
dampeners.
Considering the impact of the abovementioned acquisition on the
company's financials and other non-recurring charges, net income
came in at $92 million or 16 cents per share compared with $1.4
billion or $2.72 per share in the prior quarter.
Performance in Detail
Capital One's total revenue for the reported quarter stood at $5.06
billion, rising 2.4% sequentially. However, total revenue was below
the Zacks Consensus Estimate of $5.75 billion.
Net interest income for the quarter grew 17.2% from the previous
quarter to $4.00 billion. The growth was fuelled by increases in
average interest-earning assets. However, it was partially offset
by certain charges related to the
ING Groep NV
(
ING
) and HSBC acquisitions.
Net interest margin in the quarter fell 16 basis points (bps)
sequentially to 6.04%. The drop primarily resulted from reduced
asset yields, partially mitigated by positive changes in the
funding mix
Non-interest income declined 30.7% from $1.52 million in the prior
quarter to $1.05 billion in the reported quarter. The absence of
bargain purchase gain pertaining to the acquisition of ING Direct
and lower other non-interest income was the reasons behind the
decline.
Capital One's operating expenses increased 25.5% sequentially to
$3.14 billion. The rise was mainly due to higher salaries and
benefits, marketing expenses, merger related expenses, along with
occupancy costs as well as other miscellaneous expenditure.
The managed efficiency ratio increased to 62.16% from 50.74% in the
prior quarter. The hike in efficiency ratio indicates deterioration
in profitability.
Credit Quality
Capital One's credit quality showed significant improvement during
the quarter. Net charge-off rate declined from 2.04% in the prior
quarter and 2.91% in the prior-year quarter to 1.53%. Moreover, the
30-plus day performing delinquency rate declined 17 bps
sequentially and 84 bps year over year to 2.06%. However,
allowance, as a percentage of reported loans held for investment,
came in at 2.47% compared with 2.34% in the previous quarter and
3.48% in the year-ago quarter.
Further, provision for credit losses increased 192.7% sequentially
to $1.68 billion. The rise was mainly due to allowances bought over
by the acquisition of HSBC's credit card business.
Capital and Profitability Ratios
The company's capital and profitability ratios continued to elevate
during the quarter. Tangible common equity (TCE) ratio for the
reported quarter was 7.4%, down from 8.2% in the prior quarter and
7.9% in the prior-year quarter.
As of June 30, 2012, tier 1 risk-based capital ratio came in at
11.6% as against 13.9% in the prior quarter and 11.8% in the
prior-year quarter. The company's tangible book value per share was
$35.67 as of June 30, 2012 compared with $39.37 as of March 31,
2012 and $31.94 as of June 30, 2011.
Other Developments
Concurrent with the earnings release Capital One announced that the
Office of the Comptroller of the Currency (OCC) and the Consumer
Financial Protection Bureau (CFPB) has penalized it for issues
related to cross-sell activities in its domestic card business. The
company has agreed to pay $210 million to resolve the issues.
Peer Performance
Discover Financial Services
(DFS) posted its second-quarter results, with earnings surpassing
the Zacks Consensus Estimate. The decline in profits resulted from
lower reserve releases, which offset revenue growth and higher
interest income. Results were also affected by higher expenses and
a decline in the pre-tax income from the Direct Banking segment.
Our Viewpoint
We anticipate continued synergies from Capital One's geographic
diversification. Just as ING Direct was accretive to the company's
financials, we anticipate the acquisition of HSBC's U.S. credit
card business will boost its top line and improve its market
position in terms of deposits and assets. Also, a increase in loan
demand will boost earnings growth in the near future.
However, rising operating expenses and its commercial real estate
exposure will be the negatives.
Capital One currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
also maintain a long term 'Neutral' recommendation on the shares.
CAPITAL ONE FIN (COF): Free Stock Analysis
Report
DISCOVER FIN SV (DFS): Free Stock Analysis
Report
HSBC HOLDINGS (HBC): Free Stock Analysis Report
ING GROEP-ADR (ING): Free Stock Analysis Report
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