Fitch: Slightly Higher 2Q'14 Earnings for Capital One Financial

Fri Jul 18, 2014 12:10pm EDT

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(The following statement was released by the rating agency) CHICAGO, July 18 (Fitch) Capital One Financial's (COF) second quarter 2014 (2Q'14) earnings were modestly higher than both the sequential and year-ago quarters due largely a moderate reserve release as provision expense was less than net-charge offs (NCO) and higher net interchange revenue on increased purchase volumes and lower start-up costs on new rewards programs, according to Fitch Ratings. These results equated to a 1.63% return on average assets (ROA), which Fitch notes is a good result. Given that Fitch expects reserve releases to further abate over the course of the year due to credit quality likely being near or at a cyclical trough and some loan growth necessitating higher provisioning, Fitch would expect the company's ROA to trend down at some point over the next couple of quarters. That said, COF remains sensitive to higher short-term interest rates, so should they begin to rise (whenever that may be), this could help support the company's ROA over an intermediate to longer-term time horizon. Total net revenue was up 2% relative to the sequential quarter as growth in net interchange revenue amid higher purchase volumes and lower costs on some rewards programs offset continued pressure on asset yields weighed on net interest income (NII) and the company's net interest margin (NIM), which came in at 6.55% in 2Q'14. Relative to the year-ago quarter total net revenue was down 3% driven by lower NII and lower services charges on deposit accounts offset by higher net interchange revenue. Non-interest expenses were up 2% relative to the sequential quarter, but down 1% relative to the year-ago quarters. Marketing expense modestly increased relative to the sequential quarter as did other operating expenses, of which higher occupancy and professional services costs were the drivers, in part offset by lower acquisition related expenses. Given the challenging revenue environment amid the protracted low interest rate environment, Fitch continues to expect expense management to be a focus of COF as well as the rest of the banking industry. Credit quality continues to be strong across COF's various lending products, though there has been some very modest reversion in delinquencies and non-performing assets for the company's auto loans. Nevertheless this reversion is off of a very low base. On balance, Fitch continues to believe that credit quality for COF, as well as its peer banks, is nearing or at a cyclical trough, and Fitch would expect some reversion in these metrics over an intermediate to longer-term time horizon. COF's Common Equity Tier 1 (CET1) ratio under the Basel III fully phased in advanced approach (COF's binding constraint) remained above its target of 8%. Fitch continues to view COF's capital ratios as adequate, but below the average of some similarly rated entities. However, in Fitch's view, this continues to be offset by COF's superior capital generation abilities relative to some peers. Contact: Justin Fuller, CFA Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Meghan Neenan, CFA Senior Director +1-212-908-0221 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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