DFS Discover Financial Services

Lower expenses and a rise in fee income drove Capital One Financial Corp.’s (COF) first-quarter 2014 earnings of $1.96 per share, which surpassed the Zacks Consensus Estimate by 17.4%. Further, the figure was up 10.7% from $1.77 earned in the prior-year quarter.

Better-than-expected results were primarily attributable to growth in fee income, lower provision for credit losses and decline in operating expenses, partially offset by lower net interest income. Moreover, credit quality and capital ratios continued to improve, while profitability ratios were a mixed bag.

Net income from continuing operations was $1.12 billion or $1.91 per share compared with $1.13 billion or $1.90 per share in the year-ago quarter.

Performance Details

Capital One’s net revenue was $5.37 billion, down 3.3% year over year. Also, the figure lagged the Zacks Consensus Estimate of $5.45 billion.

Net interest income fell 4.8% from the previous-year quarter to $4.35 billion due decrease in total interest income. Also, net interest margin declined 9 basis points (bps) year over year to 6.62%.

Non-interest income increased 4.0% year over year to $1.02 billion on the back of higher other income and lower net other-than-temporary impairment losses. These positives were partly offset by decrease in service charges and other customer-related fees as well as a drop in interchange fees.

Non-interest expenses declined 2.0% from the prior-year quarter to $2.93 billion. The decrease was mainly due to fall in communications and data processing costs, amortization of intangibles and other expenses. These were partially offset by a rise in salaries and associate benefits costs as well as marketing expenses.

The efficiency ratio deteriorated to 54.60% from 53.88% in the prior-year quarter. A rise in efficiency ratio indicates decline in profitability.

Credit Quality

Capital One’s credit quality showed improvement, with provision for credit losses declining 16.9% year over year to $735 million. Further, net charge-off rate decreased 28 bps year over year to 1.92%.

Moreover, the 30-plus day performing delinquency rate fell 15 bps from the year-ago quarter to 2.22%. Additionally, allowance, as a percentage of reported loans held for investment, came in at 2.12%, down 29 bps from the previous-year quarter.

Capital and Profitability Ratios

Capital One’s profitability ratios were a mixed bag. As of Mar 31, 2014, return on average assets grew to 1.53% from 1.50% as of Mar 31, 2013. However, return on average common equity declined to 10.53% from 11.15% in the prior-year quarter.

The company’s capital ratios continued to improve. As of Mar 31, 2014, Tier 1 risk-based capital ratio came in at 13.4%, up from 12.1% as of Mar 31, 2013. Moreover, total risk-based capital ratio grew to 15.4% from 14.4% as of Mar 31, 2013.

Additionally, common equity Tier 1 capital ratio under Basel III Standardized Approach was 13.0% as of Mar 31, 2014.

Further, Capital One received the Federal Reserve’s approval of its 2014 capital plan. The company plans to repurchase $2.5 billion shares through the first quarter of 2015.

Our Viewpoint

We anticipate continued synergies from Capital One’s geographic diversification and its major acquisitions, namely HSBC Holdings plc’s (HSBC) credit card business and ING Direct USA, the online banking unit of ING Groep NV (ING). Moreover, the resilience shown by most of the company’s businesses will continue to support its financials, going forward.

Nevertheless, exposure to commercial real estate, a weak loan demand and the impact of new financial regulations are expected to affect results in the near term.

Currently, Capital One carries a Zacks Rank #3 (Hold).

Among other card servicing stocks, Discover Financial Services (DFS) is slated to announce results on Apr 22.

 
CAPITAL ONE FIN (COF): Free Stock Analysis Report
 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
HSBC HOLDINGS (HSBC): Free Stock Analysis Report
 
ING GROEP-ADR (ING): Free Stock Analysis Report
 
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