The card-focused banking group Capital One Financial (NYSE:COF) detailed its performance figures for the first quarter of the year late Thursday evening, and despite a reduction in top-line figures for two consecutive quarters, the earnings figure beat expectations thanks to a marked reduction in provisions.  This is really nothing to hold against Capital One as almost all banks have reported a similar trend for their traditional banking operations this quarter. In fact, the bank did well to boost its net interest margin (NIM) figure for the quarter to 6.71% from the 6.52% it reported last quarter – a marked improvement in a prolonged low interest rate environment that has led to a decline in NIM figures for the banking giants Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM).
The bank’s top management had another positive piece of information to share – the bank intends to use the cash it generates through the sale of its Best Buy card portfolio to Citigroup (NYSE:C) for buying back shares towards the end of the year.
We have reduced our price estimate for Capital One’s stock from $62 to $58 largely to factor in the reduction in outstanding credit card loans after the Best Buy portfolio sale. A continuing reduction in the mortgage and retail banking loan portfolio along with a slower projected rate of improvement in operating margins also contributed to this downward revision. As the share repurchase plan needs the Feds approval first, we are not considering it in our estimates for now.
Credit Card Charge-Offs Still Remain A Concern
One of the unwanted side-effects of Capital One’s acquisition of HSBC’s (NYSE:HBC) U.S. card business was a notable increase in charge-off rates for the bank’s credit card business. This is because credit card loans by the erstwhile HSBC unit were not given out on similarly stringent terms that Capital One employs. This was the inherent trade-off in the deal – while the acquisition boosted the credit card portfolio and also brought in cost synergies, the overall charge-off rate on loans (and hence the corresponding provisions) will remain higher than their historical levels.
And while the credit outlook for the U.S. is generally positive, Capital One’s charge-off rates remain on the high side. The bank reported a charge-off rate of 4.45% for its credit card business this quarter – the highest figure since Q2 2011. If these rates remain at current elevated level for another couple of quarters, then the bank will end up setting aside the same amount of provisions it did last year, and this would present a marked downside to the bank’s share price.
Loan Portfolio Shows Mixed Growth
Capital One’s credit card portfolio shrunk from $92 billion at the end of Q4 2012 to $78 billion at the end of Q1 2013. While the Best Buy portfolio sale would have reduced the size by $7 billion, the remaining $7 billion decline entails a mix of an increase in loans marked as held-for-sale, lower credit card activity and deliberate run-off of certain acquired loans.
Commercial banking loans saw continued growth, though, with commercial loan portfolio increasing to above $38 billion from $37.6 billion the last quarter as a result of an increase in lending activity in both commercial real-estate and industrial sectors.
Auto loans demonstrated a decent growth over the quarter ($27.1 billion to $27.9 billion) with the bank originating $3.8 billion auto loans in Q1 2013. In contrast, mortgage loans outstanding and other retail loans fell over the period resulting in an overall decline in period-end consumer loans outstanding.Notes:
- Capital One Reports First Quarter 2013 Net Income of $1.1 billion, or $1.79 per share, Capital One Press Releases, Apr 18 2013 [↩]