Capital One (COF) Down 1.2% Despite Q2 Earnings & Revenue Beat

Capital One’s COF second-quarter 2021 adjusted earnings of $7.71 per share handily outpaced the Zacks Consensus Estimate of $4.78. The bottom line improved significantly from adjusted loss of $1.61 incurred in the year-ago quarter.

Results benefited from solid rise in loan balances, which supported net interest income. Higher consumer confidence aided credit card business, leading to higher non-interest income. Further, provision benefits, mainly due to reserve releases, acted a tailwind.

However, rise in operating expenses was an undermining factor. During the quarter, the company built legal reserve of $55 million. Perhaps these were the primary reasons for investors’ bearish stance, as the company’s shares lost 1.2% in the afterhours trading session.

Net income available to common shareholders (GAAP basis) was $3.45 billion or $7.62 per share against a net loss of $1.01 billion or $2.21 per share in the prior-year quarter.

Revenues & Expenses Rise, Loan Balance Up

Total net revenues were $7.37 billion, up 12% from the prior-year quarter. The top line beat the Zacks Consensus Estimate of $7.10 billion.

Net interest income grew 5% from the prior-year quarter to $5.74 billion.

Net interest margin also increased 11 basis points (bps) to 5.89%. This was mainly driven by lower rates on interest-bearing liabilities, partly offset by higher balances and lower yields in investment securities.

Non-interest income of $1.63 billion jumped 49% from the prior-year quarter. This was largely attributable to 51% surge in net interchange fees and 49% rise in service charges and other customer-related fees.

Non-interest expenses were $3.97 billion, up 5%.

Efficiency ratio was 53.78%, down from 57.50% in the year-ago quarter. A fall in efficiency ratio indicates improvement in profitability.

As of Jun 30, 2021, loans held for investment were $249.6 billion, up 3% from the prior quarter. Total deposits, as of the same date, fell 1% to $306.3 billion.

Credit Quality Improves

Provision for credit losses was a benefit of $1.16 billion against a provision of $4.24 billion in the year-ago quarter. This was mainly driven by $1.7 billion of reserve releases. The 30-plus day performing delinquency rate declined 34 bps to 1.75%.

Also, net charge-off rate decreased 150 bps year over year to 0.88%. Allowance, as a percentage of reported loans held for investment was 4.95%, down 174 bps.

Capital Ratios Improve

As of Jun 30, 2021, Tier 1 risk-based capital ratio was 16.6%, up from 14.2% a year ago. Common equity Tier 1 capital ratio was 14.5% as of Jun 30, 2021, up from 12.4%.

Share Repurchase Update

During the quarter, Capital One repurchased 11.4 million shares for $$1.7 under its $7.5 billion authorization.

Our View

Capital One’s strategic acquisitions, rise in demand for consumer loans and steady improvement in the card business position it well for long-term growth. However, lower interest rates remain a major near-term concern.

Capital One Financial Corporation Price, Consensus and EPS Surprise

Capital One Financial Corporation Price, Consensus and EPS Surprise

Capital One Financial Corporation price-consensus-eps-surprise-chart | Capital One Financial Corporation Quote

Currently, Capital One carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance & Earnings Date of Other Consumer Loan Providers

Ally Financial’s ALLY second-quarter 2021 adjusted earnings of $2.33 per share surpassed the Zacks Consensus Estimate of $1.55. The bottom line showed significant improvement from 61 cents recorded a year ago.

Sallie Mae SLM reported second-quarter 2021 core earnings per share of 45 cents, which handily surpassed the Zacks Consensus Estimate of 39 cents. The bottom line reflected substantial improvement from a loss of 22 cents incurred in the prior-year quarter.

Navient Corporation NAVI is scheduled to announce quarterly number on Jul 27.

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