Capital One Beats Handsomely - Analyst Blog
October 21 2011 - 4:08AM
Zacks
Capital One Financial Corp. (COF) reported
third quarter 2011 earnings from continuing operations of $1.88 per
share, handsomely beating the Zacks Consensus Estimate of $1.70.
Though this compares unfavorably with $2.04 per share earned in the
prior quarter, it surpassed earnings of $1.79 per share recorded in
the year-ago quarter.
Better-than-expected results for the quarter were primarily
aided by increased revenues. Though the company’s capital and
profitability ratios showed improvement, its asset quality showed
mixed results. However, increase in operating expenses and higher
provision for loan and lease losses were the downsides.
Additionally during the quarter, Capital One announced an
agreement to acquire HSBC Holdings Plc’s (HBC)
U.S. credit card business for $32.7 billion. The deal, which is
expected to be completed in the second quarter of 2012, will bring
long-term benefits for the company.
Furthermore, during the second quarter Capital One announced to
acquire ING Direct USA, the online banking unit of Amsterdam-based
ING Groep NV (ING), in a stock-cum-cash
transaction valued at $9.0 billion. The acquisition is expected to
close late this year or early next year.
Quarter in Detail
Capital One’s net income from continuing operations was $865
million, down 8.5% from $945 million in the prior quarter but up
5.7% from $818 million in the year-ago quarter. Adjusting the loss
from discontinued operations, Capital One’s net income came in at
$813 million or $1.77 per share, compared with $911 million or
$1.97 per share in the previous quarter and $803 million or $1.76
per share in the year-ago quarter.
Total revenue for the reported quarter stood at $4.15 billion,
up 4.0% sequentially and 3.4% year over year. The growth was mainly
driven by higher net interest income. Total revenue also topped the
Zacks Consensus Estimate of $4.04 billion.
Net interest income upped 4.7% sequentially and 5.6% year over
year to $3.28 billion. Similarly, non-interest income also rose
1.6% sequentially but fell 4.0% year over year to $871 million.
Net interest margin (NIM) improved 19 basis points (bps)
sequentially and 18 bps year over year to 7.39%. The rise was
attributable to the increase in earning asset yields, partially
offset by higher cost of funds.
Capital One’s operating expenses for the reported quarter
climbed 1.9% sequentially and 15.1% year over year to $2.30 billion
mainly due to rise in salaries and associate benefits expenses.
The managed efficiency ratio improved to 55.30% from 56.47% in
the prior quarter. The increase in efficiency ratio indicates
deterioration in profitability.
Credit Quality
Capital One’s credit quality was a mixed bag during the quarter.
Allowance, as a percentage of reported loans held for investment,
slipped 19 bps sequentially to 3.29%. Also, the net charge-off rate
dropped 39 bps sequentially to 2.52%, as a continued improvement in
credit led to charge-off improvements across all business
segments.
However, the 30-plus day performing delinquency rate also scaled
up 23 bps sequentially to 3.13%. Similarly, provision for loan and
lease losses increased 81.3% sequentially but declined 28.3% year
over year to $622 million.
Capital and Profitability Ratios
Capital One’s capital and profitability ratios continued to
enhance during the quarter. Tangible common equity (TCE) ratio for
the quarter improved to 8.3% from 7.9% in the prior quarter. Also,
Tier 1 risk-based capital ratio rose 60 bps sequentially to
12.4%.
The company’s tangible book value per share was $33.82 as of
September 30, 2011 compared with $32.20 as of June 30, 2011.
Peer Performance
One of the close peers of Capital One, Discover
Financial Services (DFS) posted a solid third quarter,
reporting earnings substantially ahead of the Zacks Consensus
Estimate. The surge in profits was driven by strong sales volume
complemented by lower interest expense, reduced provision for loan
losses and delinquency rates based on improved credit quality.
The profit was also boosted by the escalated income from both
direct banking and payment services business. However, these were
partially offset by increased operating and tax expenses.
Our Viewpoint
We anticipate continued synergies from the company’s geographic
diversification. Additionally, the resilience shown by almost all
its businesses will continue to support its financials. The
upcoming acquisitions of ING and HSBC units will also improve the
company’s position in terms of deposits and assets, as well as be
significantly accretive to its financials.
However, rising operating expenses and the company’s commercial
real estate exposure will remain dampeners. Moreover, a weak loan
demand, along with the impact of the new financial reform law, will
suppress earnings in the near future.
Capital One currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Also, considering the fundamentals,
we 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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