Capital One Outshines - Analyst Blog

Capital One Financial Corp.'s (COF) fourth quarter earnings from continuing operations of $1.53 per share were substantially ahead of the Zacks Consensus Estimate of $1.35. This compares unfavorably with earnings of $1.79 in the prior quarter but favorably with earnings of 89 cents in the year-ago quarter.

Results for the quarter benefited over the prior-year quarter primarily from increased revenues and a lower provision for loan losses due to improved credit performance. However, an increase in operating expenses was a headwind.

For full year 2010, earnings from continuing operations came in at $6.68 per share, substantially up from 98 cents in 2009. This was also better than the Zacks Consensus Estimate of $5.91.

Total revenue for the reported quarter came in at $4.0 billion, down 1.3% sequentially but up 17.7% year over year. On a non-GAAP basis, total revenue decreased 1.3% from the prior quarter and 9.3% from the year-ago quarter to $4.0 billion. Revenues beat the Zacks Consensus Estimate of $3.9 billion.

Capital One's net income from continuing operations was $701 million, down 14.3% from $701 million in the prior quarter but up 73.5% from $404 million in the year-ago quarter. Adjusting the loss from discontinued operations, Capital One's GAAP net income came in at $697 million or $1.52 per share, compared with $803 million or $1.76 in the earlier quarter and $376 million or 83 cents in the year-ago quarter.

Quarter in Detail

On non-GAAP basis, net interest income decreased 2.8% sequentially and 4.6% year over year to $3.0 billion. Non-interest income increased 3.5% sequentially but fell 21.7% year over year to $939 million.

Non-GAAP provision for loan and lease losses decreased 3.2% sequentially and 54.6% year over year to $839 million. The sequential increase in managed provision for loan and lease losses was driven by lower charge-offs, which were partially offset by a smaller allowance release in the reported quarter.

Non-GAAP net interest margin (NIM) decreased 26 basis points (bps) sequentially but increased 5 bps on a year-over-year basis to 6.95%.

Capital One's operating expenses for the reported quarter inched up 2.1% sequentially and 3.2% year over year to $1.8 billion. The managed efficiency ratio deteriorated to 52.78% from 49.70% in the prior quarter and 43.85% in the prior-year quarter.

Credit Quality

Capital One's credit quality continued to improve during the quarter. Allowance as a percentage of reported loans held for investment decreased 42 bps sequentially to 4.47%. Also, the net charge-off rate dropped 37 bps sequentially to 4.45%. The 30-plus day performing delinquency rate declined 11 bps sequentially to 3.60%.

Capital and Profitability Ratios

Capital One's tangible common equity (TCE) ratio for the quarter was 6.86%, up 28 bps from the prior quarter level of 6.58%. The Tier 1 risk-based capital ratio increased 51 bps sequentially to 11.64%, and continues to stay above the regulatory well-capitalized minimum.

Tangible book value per share was $27.73 as of December 31, 2010, compared with $26.60 as of September 30, 2010 and $27.72 as of December 31, 2009.

Our Viewpoint

We anticipate continued synergies from Capital One's geographic diversification. Additionally, the resilience of almost all its businesses will continue to support the company's financials. However, its commercial real estate exposure will remain a drag. Also, weak loan demand and the impact of the financial reform law will restrict earnings in the near future.

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's rival card company American Express (AXP) is scheduled to release its fourth quarter and full year results on January 24.

 
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