Capital One Financial Corp.’s (COF) fourth quarter net income from continuing operations of 90 cents per share was substantially better than the Zacks Consensus Estimate of 45 cents. This also compares favorably to a net loss of $3.67 per share in the year-ago period.
Results for the quarter benefited over the prior-year quarter primarily from increased revenues. Also, resilience and strong profitability of the domestic credit card and auto finance businesses acted as positive catalysts to stave off a weak economy and credit headwinds. Additionally, a substantial decrease in provision for loan losses was impressive during the quarter. However, an increase in operating expenses was the downside.
Including the loss from discontinued operations, Capital One’s GAAP net income came in at $375.6 million or 83 cents per share, compared to net loss of $1.5 billion or $3.74 in the earlier quarter.
For full year 2009, Capital One’s earnings came in at $319.9 million, or 74 cents per share, compared to a net loss of 78.7 million or 21 cents in the previous year. Results for the current year were negatively impacted by $563.9 million or $1.31 per share outflow for the repayment of government bailout money.
Behind the Headlines
Total managed revenues for the quarter decreased 4.7% sequentially but improved 10.6% year-over-year to $4.4 billion. The sequential decrease in revenue was driven primarily by fewer gains from securities sales compared to the prior quarter.
Managed net interest margin decreased 1 basis point sequentially but increased 84 basis points (bps) on a year-over-year basis to 6.90%.
Net interest income decreased 1.3% sequentially but increased 14.5% year-over-year to $3.2 billion. Non-interest income decreased 12.7% sequentially but improved 1.3% year-over-year to $1.2 billion.
Managed provision for loan losses decreased 16.1% sequentially and 35.9% year-over-year to $1.8 billion. Provision expense decreased sequentially due to a $386.1 million allowance release in the reported quarter, which has more than offset the increase in charge-offs, driving the decrease in provision expense.
Capital One’s operating expenses for the reported quarter increased 3.3% sequentially and 6.1% year-over-year to $1.7 billion. The managed efficiency ratio increased to 43.85% from 38.73% in the prior quarter.
Average deposits for the quarter decreased 1.1% over the prior quarter to $114.6 billion.
Questions Regarding Credit Quality
Capital One’s credit quality remained mixed during the quarter. Allowance as a percentage of reported loans held for investment decreased 13 bps sequentially to 4.95%. Net charge-offs increased 18.1% sequentially but decreased 45.8% year-over-year to $1.2 billion. Net charge-off rate deteriorated 50 bps sequentially to 5.44%. The 30-plus day performing delinquency rate increased 1 basis point sequentially to 4.49%.
Evaluation of Capital and Profitability Ratios
Capital One’s tangible common equity (TCE) ratio for the quarter was 6.3%, a slight improvement from the prior quarter level of 6.2%. The Tier 1 risk-based capital ratio increased 200 bps relative to the prior quarter to an estimated 13.8%, and continues to stay above the regulatory well-capitalized minimum. Tangible book value per share of common stock was $27.72 as of Dec 31, 2009, compared to $26.86 as of Sep 30, 2009, and $28.23 as of Dec 31, 2008.
Segment Results
Net income in the Credit Card segment came in at $505.9 million, up 74.8% from the prior quarter’s income of $291.7 million. Results were driven by lower provision expense during the reported quarter.
Net loss for the Commercial Banking segment was $136.0 million compared to a net loss of $127.7 million in the prior quarter. Revenue for this segment increased 3.5% sequentially to $356.6 million while non-interest expense increased 18.9% sequentially to $197.4 million.
Net loss in the Consumer Banking segment came in at $7.7 million compared to a net income of $145.2 million in the prior quarter. The loss primarily resulted from increased provision expense, driven by seasonal increases in Auto Finance and continued deterioration in mortgage and home equity credit trends.
We anticipate continued synergies from Capital One’s geographic diversification and expense management initiatives. Additionally, the repayment of bailout money and the warrants sell-off by the Treasury augur well for investors as the company is now free from government intervention and pay restrictions. However, its commercial real estate exposure will remain a drag. We also believe the weakening demand for new loans and the pressure on credit quality will restrict earnings in the near future.
Comparison with Peers
Rival card company American Express (AXP) also reported its fourth quarter results concurrent with Capital One’s earnings release after the market closed on Jan 21, 2009. AmEx’s fourth-quarter earnings from continuing operations of 59 cents per share were ahead of the Zacks Consensus Estimate of 56 cents. This also compares favorably to an earnings from continuing operations of 26 cents in the prior-year quarter.
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