Capital One’s Q2 Results Suffer Due To One-Time Costs

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Capital One Financial

Capital One (NYSE:COF) avoided reporting in the red by a whisker last week with compounding costs from its acquisition of HSBC’s card business, the settlement with federal authorities and additional loan provisions dragging down its net income for Q2 2012 despite healthy top-line growth. ((Q2 2012 Earnings Press Release, Capital One Investor News, Jul 18 2012)) The bank ended with earnings of just $93 million for the quarter – far from $1.4 billion earned last quarter and $911 million for the same quarter last year. Investors did not pay much heed to this decline as Capital One’s revenues jumped by about 16% and 25% compared to Q1 2012 and Q2 2011, respectively.

We revised our price estimate for Capital One’s stock marginally from $60 to $61 to factor in better-than-expected margins for its business from the recent acquisitions of ING Direct and HSBC cards.

See our full analysis for Capital One

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Another Quarter of Inorganic Loan Growth for Capital One

The company reported an increase in the size of its domestic card loan portfolio by  $27.6 billion this quarter – the exact size of the portfolio it acquired from HSBC. Commercial loans grew by 3% and automobile loans by almost 7% over the quarter while the home loans portfolio shrunk by 3%.

There is no surprise in the small growth figures here as the slow economic conditions prevalent during the period saw customers shying away from the prospect of taking on additional debt.

Keep an Eye on the Provision Figures, Though

Capital One recorded provisions of $1.7 billion for the quarter, largely because of the one-time impact of the addition of HSBC’s card portfolio to its own. The bank was forced to set aside $1.2 billion as provision due to the acquisition. And overall, it benefited from a $259 million release in provisions for its existing business as charges for the quarter showed significant improvement. We will, however, need to wait to see if the amount set aside to capture the acquisition from HSBC is adequate.

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