Capital One

Capital One Financial Corp. (NYSE:COF) reported 1Q13 EPS of $1.79Consensus was $1.61.  It booked a $107mn ($0.13) provision for rep & warranty, $46mn ($0.05) of merger costs and $25mn ($0.03) of OTTI.  It also called $3.6bn of TruPS resulting in $65mn ($0.07) one-time charge, but a $75mn benefit to interest expense.  It also released $261mn ($0.29) of loan loss reserves.  Additionally, Capital One Financial Corp. (NYSE:COF) revealed the BBY add $87mn pre-tax ($0.11) in 1Q13 (4Q13 & beyond issue).

Capital One Financial Corporation is a diversified financial services holding company. The Company and its subsidiaries offer a range of financial products and services to consumers, small businesses and commercial clients through branches, the Internet and other distribution channels.


After missing expectations in 4Q12, COF exceeded them in 1Q13.  While 4Q12’s net interest margin was a bit below expectations, results in 1Q13 came in ahead of Barclays forecast.  Additionally, its loan loss provision was lower than anticipated, while expenses fell.  While a lot of moving pieces and BBY disappears before year-end, 1Q13 results could provide some needed comfort.  


Capital One operating revenues declined 1% from 4Q12, driven principally by lower average loan balances and purchase volume partially offset by higher margins.  PPNR increased 6%.  It noted excluding HFS accounting, it revenue margin was 16.3%, in line with seasonal patterns.  It posted an ROA of 1.51% and an ROE of 11.17% (19.09% on tangible).  Its tier 1 common ratio was 11.8% (+80bps).  Basel III tier 1 common was closer to 8.5%.

Net interest income rose 1% from 4Q12.  Average earning assets declined 2% with loans down 1%, securities up 1% and cash equivalent falling 33% or $3.5bn to $7.1bn (TruPS redemption).  Average loans held for investment (HFI) decreased $6.9bn, or 3%, led by a 7% decline in Domestic Card (BBY).

Period-end loans held for investment decreased $14.6bn, or 7%, to $191.3bn.  The decrease was due in part to the movement of the Best Buy (BBY) portfolio of $7bn of loans to head for sale (HFS) from HFI during the quarter.  Domestic Card period-end loans decreased $12.8bn, or 15%, to $70.4bn, driven largely by the movement of loans to HFS, seasonally lower balances and purchase volumes, and the anticipated run-off of certain acquired loans.

Capital One excluding loans reclassified to HFS during 1Q13, Domestic Card period-end loans decreased $5.6bn, or 7%.  Commercial Banking loans increased $330mn, or 0.9%, to $39.2bn, and Auto Finance grew $817nb, or 3%, to $27.9bn.  Home Loans declined $2.2bn, or 5%, to $41.9bn, driven by the continued run-off of acquired portfolios.

Capital One Financial Corp. (NYSE:COF) net interest margin increased 19bps to 6.71% driven by a reduction in interest expense (11bps) and release of cash related to the redemption of high coupon TruPS (8bps).  It also saw a 7bp benefit from movement of partnership portfolio to HFS and 15bp drag from 2 fewer days.  Period-end total deposits were stable with 4Q12, while average deposits declined 1%.  Deposit interest rates declined 4bps to 0.68%.  Its cost of funds declined 16bps to 0.83%.

Capital One fee income declined 9%.  Expenses fell 6%, driven largely by the lack of seasonally high year-end expenses from 4Q12 and lower amortization expense.  Marketing expense decreased $76mn.  Premium amortization declined from $124mn to $111mn.  Its effective tax rate was 30.2%, compared to 30.4% in the prior quarter.

Capital One Financial Corp. (NYSE:COF) NCO ratio declined to 6bps to 2.20%.  Barclays estimate was 2.25%, while consensus was 2.31%.  Domestic card NCOs were 4.43%, up 8bps.  Overall 30-day plus delinquencies (ex. acquired loans) declined 39bps to 2.90%.

Capital One Financial Corp. (NYSE:COF) loan loss provision was $885mn (-$266mn) as it released $261mn of loan loss reserves.  The largest component of the release was in Domestic Card, due to better than anticipated credit performance in the quarter, including delinquencies, and an improvement in drivers for its future outlook.  It also built its reserve for unfunded commercial commitments & foreign currency adjustment by $67mn.  Its reserve/loan ratio (ex. acquired loans) declined 11bps to 2.91%.  

For the fiscal year ended 31 December 2012, Capital One Financial Corp. interest income increased 27% to $18.96B. Net interest income after loan loss provision increased 17% to $12.17B. Net income applicable to common stockholders excluding extraordinary items increased 15% to $3.7B. Net interest income after loan loss provision reflects Consumer Banking segment increase of 37% to $5.2B, Commercial Banking segment increase of 28% to $2.01B.