Capital One Gains from Acquisitions - Analyst Blog
October 19 2012 - 3:40AM
Zacks
Capital One Financial Corp.’s (COF) third
quarter 2012 earnings of $2.01 per share significantly surpassed
the Zacks Consensus Estimate of $1.75. Also, this substantially
outpaced the prior-quarter earnings of 16 cents.
Results improved on the back of augmented revenue, which was driven
by the full quarter impact of the acquisitions of HSBC
Holdings plc’s (HBC) credit card business and ING Direct
USA – online banking unit of ING Groep NV (ING).
Further, lower operating costs and robust profitability as well as
capital ratios were the highlights of the quarter. Yet, substantial
deterioration in the asset quality was the primary dampener.
Net income from continuing operations came in at $1.19 billion or
$2.03 per share compared with $193 million or 33 cents per share in
the prior quarter.
Performance in Detail
Capital One’s total revenue for the reported quarter stood at $5.78
billion, jumping 14.4% sequentially. The surge was largely due to
the full-quarter impact of the HSBC credit card loans acquired in
the second quarter and a lower non-principal reserve build.
Moreover, total revenue was above the Zacks Consensus Estimate of
$5.54 billion.
Net interest income for the quarter grew 16.4% from the previous
quarter to $4.64 billion. Likewise, net interest margin in the
quarter increased 93 basis points (bps) sequentially to 6.97%.
Non-interest income surged 7.8% from $1.05 million in the prior
quarter to $1.14 billion in the reported quarter. The increase was
mainly due to the full-quarter impact of the HSBC credit card
acquisition.
Capital One’s operating expenses declined 3.1% sequentially to
$3.05 billion. The fall was largely attributable to a decrease in
charges for legal and regulatory matters as well as lower
merger-related and marketing expenses, partially offset by the
full-quarter impact of the HSBC credit card acquisition.
The managed efficiency ratio improved to 52.66% from 62.16% in the
prior quarter. The fall in efficiency ratio indicates improvement
in profitability.
Credit Quality
Capital One’s credit quality showed considerable deterioration
during the reported quarter. Net charge-off rate rose 22 bps from
1.53% in the prior quarter to 1.75%. Similarly, the 30-plus day
performing delinquency rate increased 48 bps sequentially to 2.54%.
Moreover, allowance, as a percentage of reported loans held for
investment, came in at 2.54%, up 7 bps from 2.47% in the previous
quarter.
However, provision for credit losses decreased 39.5% sequentially
to $1.01 billion. The decline was driven by a significantly lower
HSBC-related allowance build.
Capital and Profitability Ratios
Capital One’s capital and profitability ratios continued to elevate
during the quarter. Tangible common equity (TCE) ratio for the
reported quarter was 8.2%, up from 7.4% in the prior quarter.
As of September 30, 2012, return on average assets stood at 1.60%
compared with 0.26% in the last quarter. Similarly, return on
average common equity improved to 12.33% in the reported quarter
from 2.06% in the previous quarter.
As of September 30, 2012, tier 1 risk-based capital ratio came in
at 12.7% improving from 11.6% as of June 30, 2012. The company’s
tangible book value per share was $40.17 as of September 30, 2012
compared with $35.67 as of June 30, 2012.
Our Viewpoint
We anticipate continued synergies from Capital One’s geographic
diversification and the two major recent acquisitions. Moreover,
the resilience shown by almost all its businesses will continue to
support its financials. Nevertheless, in the near term, exposures
to commercial real estate, weak demand for loans and the impact of
new financial regulations are expected to marginally dent the
results.
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
HSBC HOLDINGS (HBC): Free Stock Analysis Report
ING GROEP-ADR (ING): Free Stock Analysis Report
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