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Capital One (COF) Q2 Earnings Miss on Y/Y Increase in Provisions

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Capital One’s (COF - Free Report) second-quarter 2024 adjusted earnings of $3.14 per share lagged the Zacks Consensus Estimate of $3.28. In the prior-year quarter, earnings per share was $3.52.

In the reported quarter, there was an allowance build for Walmart program agreement loss sharing termination, a Walmart program agreement termination contra revenue impact, Discover integration expenses and an FDIC special assessment charge.

Results were adversely impacted by higher expenses and provisions. However, an increase in net interest income (NII), along with higher non-interest income, supported the results to some extent. Also, loan balances witnessed a sequential rise in the quarter, which was a positive.

After considering the non-recurring items, net income available to common shareholders was $531 million or $1.38 per share, down from $1.35 billion or $3.52 per share in the prior-year quarter. Our estimate for the metric was $1.14 billion.

Revenues Improve, Expenses Rise

Total net revenues were $9.51 billion, up 5.5% from the prior-year quarter. The top line met the Zacks Consensus Estimate.

NII increased 6.1% year over year to $7.55 billion. The NIM expanded 22 basis points (bps) to 6.70%. Our estimates for NII and NIM were $7.47 billion and 6.63%, respectively.

Non-interest income of $1.96 billion increased 3.2% from the prior-year quarter. The rise was driven by an increase in net interchange fees, and service charges and other customer-related fees. Our estimate for non-interest income was $1.91 billion.

Non-interest expenses were $4.95 billion, up 3.2% year over year. The rise was due to an increase in almost all cost components, except for salaries and associate benefits, and costs related to amortization of intangibles. We expected the metric to be $5.22 billion.

The efficiency ratio was 52.03%, down from 53.20% in the year-ago quarter. A fall in the efficiency ratio indicates an improvement in profitability.

As of Jun 30, 2024, loans held for investment were $318.2 billion, up 1% from the prior-quarter end. Total deposits were $351.4 billion, which rose marginally on a sequential basis.

Credit Quality Worsens

Provision for credit losses was $3.91 billion in the reported quarter, up 57% from the prior-year quarter. We anticipated provisions of $2.66 billion.

The 30-plus-day-performing delinquency rate rose 28 bps year over year to 3.36%. Also, the net charge-off rate jumped 54 bps to 3.36%. Allowance, as a percentage of reported loans held for investment, was 5.23%, up 53 bps year over year.

Capital Ratios Improve, Profitability Ratios Worsen

As of Jun 30, 2024, the Tier 1 risk-based capital ratio was 14.5%, up from 14% a year ago. The common equity Tier 1 capital ratio was 13.2%, improving from 12.7%.

At the end of the second quarter, the return on average assets was 0.50%, down from 1.23% in the year-ago period. Return on average common equity was 3.99%, declining from 10.70%.

Our View

Capital One’s strategic acquisitions, decent demand for consumer loans, higher rates and steady improvement in the card business position it well for long-term growth. However, elevated expenses and a tough macroeconomic backdrop are major near-term concerns.

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 of Other Finance Stocks

Ally Financial’s (ALLY - Free Report) second-quarter 2024 adjusted earnings of 97 cents per share surpassed the Zacks Consensus Estimate of 62 cents. Also, the bottom line increased 1% from the year-ago quarter.

In the reported quarter, ALLY saw a marginal increase in loans. Also, the capital ratios increased, which was a positive. However, a decline in revenues and higher expenses were the undermining factors for ALLY.

Synovus Financial Corp. (SNV - Free Report) reported second-quarter 2024 adjusted earnings per share of $1.16, which surpassed the Zacks Consensus Estimate of 96 cents. Adjusted earnings were the same as that reported in the year-ago quarter.

SNV’s results benefited from a fall in expenses and provisions for credit losses, along with strong capital ratios. However, a decline in NII and lower loan balances were the major headwinds.


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