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Capital One Financial (COF) |
HenryTo
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 Posted: Fri Jul 23, 2010 12:04 pm Post subject: Capital One Financial (COF) |
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Morningstar on COF's 2Q results. Not exactly an indicator of subprime credit card lending, but close:
| Quote: | | Capital One Financial COF reported net income of $608 million, or $1.33 per diluted share, for the second quarter, besting our estimates. The main driver behind the better-than-expected earnings was an allowance release of $1 billion, almost 10% of tangible equity. In general, we tend to be suspicious of any sizable reduction in allowance for loan losses, especially when economic uncertainty and unemployment are elevated. However, we are comfortable with CapOne's actions because of an ongoing improvement in credit quality across all business segments. Moreover, the allowance release had almost no impact on coverage ratios (allowance as percentage of delinquencies) and in terms of percentage of total loans, despite the sizable year-over-year reduction in provisions , the allowance/total loans ratio was still 91 basis points higher than the level reported at the end of the prior-year quarter. As a result, we think more allowance releases are in the cards for CapOne in the coming quarters, provided there is no material deterioration in economic conditions. Liquidity remained strong in the quarter as the loan/deposit ratio dropped to an all-time low of 108%. CapOne reported a pickup in commercial real estate activity, but we think internal loan growth will remain a challenge in the near future. CapOne benefits from excess capital, and we expect it to eventually start redeploying it in more productive manners than buying short-term fixed-income securities. Our fair value estimate is unchanged. |
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Capital One Financial (COF) Replies |
HenryTo
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| Posted: Tue Apr 24, 2012 7:51 pm Post subject: |
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Morningstar on COF's 1Q results.
| Quote: | | Capital One Financial COF earned $1.4 billion, or $2.72 per common diluted share, for the first quarter, as it recognized a $594 million gain on the acquisition of ING Direct. Excluding this special item, earnings would have been $868 million, or $1.50 per share, 15% lower than in the prior-year quarter and only slightly better than our projections. We don't expect the HSBC acquisitions to generate similar gains; hence, we think profits over the next few quarters are set to decline substantially from their current level. Overall, we are comfortable with our projections, but we will revise them once Capital One closes the acquisition of credit card assets from HSBC HBC. We are keeping our fair value estimate unchanged. |
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HenryTo
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| Posted: Fri Jan 20, 2012 5:11 pm Post subject: |
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Morningstar on COF's 4Q earnings.
| Quote: | | Capital One Financial COF ended 2011 on a sour note, with profits in the fourth quarter falling 42% from the prior-year quarter. Nevertheless, the bank reported net income of $3 billion, or $6.80 per common diluted share, for the year, 15% higher than in 2010 and only slightly below our projections. The main driver behind the growth in earnings was a decline in provisions for loan losses. Despite the anemic economic recovery in the United States, net charge-offs dropped 43% from the prior year as all major business segments reported lower nonperforming loans and declines in the flow of new troubled credits. Looking into 2012, we expect provisions to level off as we believe they now trend below what we consider as a reasonable run rate. On the earnings call, management tried to draw attention to Capital One's solid loan growth over the year. While lending activity in the U.S. remained in the doldrums, total loans grew 8% in 2011, internally and through acquisitions. Management remains bullish on growth in 2012 as it believes the firm will continue to take share from other banks. We agree that Capital One is well positioned to grab share from weaker regional banks, but competition in consumer lending in 2012 is likely to increase, which would lead to meager internal growth for the bank. The news that will grab attention is the 25% surge in operating expenses in the fourth quarter. While such a sharp increase isn't a pleasing development, it's not a surprise to us. We took into account, when preparing our projections, operating expenses above the $8 billion mark, even before accounting for recent acquisitions. We think such high expenses could hamper margins in the short run, but could support higher business volume, especially in the c ommercial banking segment, once economic conditions improve. The stock continues to trade at a meaningful discount to our fair value estimate, but we think investors should wait for better prices before they pull the trigger. Capital One will have to do some heavy lifting in 2012 as it completes two large acquisitions and integrates these businesses into its current infrastructure. We argue that the risk from this integration is high, which prompts us to look for an even wider margin of safety before buying the stock. Our fair value estimate is unchanged. |
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HenryTo
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| Posted: Fri Oct 21, 2011 2:38 pm Post subject: |
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Morningstar on COF's 3Q earnings:
| Quote: | | Capital One Financial COF is bullish on its commercial banking business and loan growth. The bank reported net income of $813 million, or $1.77 per common diluted share, 1% higher than last year and only slightly lower than our estimates. Once again, the firm managed to increase revenue from last year (up 2%) despite high unemployment in the United States and a slow economic recovery. Although fee income came in slightly lower than in the prior-year quarter, a higher net interest margin (19 basis points) and increase in earning assets led to a 6% increase in net interest income, besting our expectations. We don't expect the net interest margin to expand from its current levels, but we assume growth in earning assets in the coming quarters. Capital One had to spend money during the quarter on building its banking infrastructure and preparing to close and consolidate its recent acquisitions. Operating expenses were up 15% from last year, above our estimates but still below the level that would worry us. Credit costs bested our projections, as net write-offs came 230 basis points below their level in the prior-year quarter. Provisions for loan losses dropped 28% from the prior-year quarter but were higher than the level reported in the second quarter. We continue to model lower net charge-offs in 2012, but we think management is correct in slowing the release of reserves for loan losses. The most exciting news in the quarter was the growth in loans and loan commitments, especially on the commercial side of the business. Total loans for investment rose 3% from last year, with commercial loans leading the way with 8% growth from last year. We model slow internal growth in loans over the next few years, but given the trends in this quarter, our short-term loan growth estimates might to be too conservative. Nevertheless, we are comfortable with our long-term assumptions and are keeping our fair value estimate unchanged. |
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HenryTo
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| Posted: Wed Jul 13, 2011 4:40 pm Post subject: |
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Morningstar on COF's 2Q earnings and its $2 billion common equity offering:
| Quote: | | Capital One Financial COF launched a $2 billion sale of common stock to pay for its ING Direct acquisition. This news was concurrent with the second-quarter earnings release, which could become the company's best marketing document. Second-quarter net income was $911 million, or $1.97 per share, 50% higher than last year and about 5% better than our estimates. While most banks complain about revenue headwinds, Capital One's top line was up 2.3%--not an overwhelming growth rate, but better than many peers. The net interest margin was 11 basis points higher than last year, and the total revenue margin increased by 23 basis points from the prior-year quarter. We expect the net interest margin to come under pressure in the next few years as supply in the credit card market recovers and lenders become more competitive with their product offerings. Operating expenses in the quarter were in line with our expectations, but credit costs bested our projections. Provisions for loan losses dropped 50% from the prior year as net charge-offs declined 45%, dropping to a mere 2.91% of total loans compared with 5.36% in the second quarter of 2010. The delinquency rate also showed improvement in the credit quality of the firm's loan book, with a 17-basis-point decline from the first quarter and a 91-basis-point drop from last year. With such a strong showing, we think lower credit costs could continue to augment earnings through 2012. Although Capital One is likely to close its capital raise at a price lower than our fair value estimate, we think the dilution from this action isn't large enough to justify a lower fair value estimate, especially since the firm has been reporting better-than-expected earnings for several quarters. |
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rffrydr
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Joined: 30 Oct 2005
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Location: Sunny California
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| Posted: Sun Jun 19, 2011 9:20 am Post subject: |
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As they say, when it comes to US Banking, go large.....or go home. Don't think we'll see the flood of canadian buyouts many have been expecting.
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Today is the Tomorrow you worried about Yesterday! |
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HenryTo
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Location: Los Angeles, California
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| Posted: Fri Jun 17, 2011 6:19 pm Post subject: |
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Morningstar on COF's purchase of ING Direct:
| Quote: | | Capital One Financial COF is making a huge bet on online banking. The firm announced on Thursday that it had reached an agreement to acquire ING Direct, an internet-based bank owned by ING Group ING, for $9 billion--$6.2 billion in cash and the rest in shares. In addition to the shares to be issued to ING as part of the consideration, Capital One plans to raise $2 billion in common equity to finance part of the cash consideration. Capital One already operates an online bank, and this acquisition will boost its scale and presence turning it into the largest player in the space. With ING Direct, Capital One will boost its deposit base by $80 billion and return to the mortgage lending business after several years of absence. Management also believes that the deal will be accretive to earnings by 2012 and that the firm can generate 20% return on the capital invested in this deal. Despite these buoyant projections, we have some concerns. Capital One's banking strategy is anchored on achieving scale in branch banking, which leads to pricing advantages on loans and deposits. The online banking model is built on paying depositors high rates and charging borrowers low rates, with the expectation of making up the difference by keeping operating expenses well below the branch-based model. Our concern is that Capital One won't be successful in operating with two models under the same umbrella. More importantly, management argues that the deal is financially attractive because Capital One is only paying 1 times tangible book value and a 4% premium on deposits. However, ING Direct's deposit base is more expensive than an average commercial bank's, so the low premium is warranted in our view. In addition, the firm estimates that ING Direct's baseline earnings before provisions is $630 million, which equates to only a 7% return on the acquisition price. We think this means Capital One will have to generate $300 million in synergies just to reach a return that approximates its cost of capital. We also hate the fact that management is giving away stock to ING at a price lower than its fair value, destroying value. This transaction has the potential to become a blockbuster but it would require a lot of heavy lifting on management's part. At this point our fair value estimate remains unchanged. |
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HenryTo
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| Posted: Tue Apr 26, 2011 1:04 am Post subject: |
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Morningstar on COF's 1Q earnings:
| Quote: | Capital One Financial Reports Strong 1Q; Improving Credit Quality Boosts Earnings
Capital One Financial COF earned $1 billion, or $2.21 per diluted share, in the first quarter, almost 60% higher than in the prior year and slightly above our expectations. A sharp decrease in credit costs compared with the prior-year quarter and the previous quarter, stable revenue, and strong cost controls were the drivers behind the better earnings. Our long-term outlook for the firm is unchanged and we are maintaining our fair value estimate.
Credit quality continued to improve during the quarter, with total delinquent loans/total loans dropping to 3.11% compared with 3.6% at year-end and 4.22% in the prior-year quarter. Total net charge-offs were almost half the level reported a year ago and 18% lower than in the fourth quarter. With such strong improvement in credit quality, many banks would have aggressively reduced the allowance for loan losses--but not Capital One. The allowance for loan losses declined less than 10% during the quarter even though it covered more than 130% of the delinquent loans. We expect lower levels of allowance in 2011.
At $2.21 per share, earnings in the quarter came in above what we consider as a reasonable run rate for the next two to three years. In the coming quarters, we expect lower margins and higher operating expenses to weigh on the bottom line. The wild card remains provisions for loan losses, which could substantially decline from current levels. All in, we think the return on common equity (15% in the first quarter) could further improve during 2011 before retreating to a more sustainable level. In our view, Capital One's biggest challenge remains redeploying its excess capital and liquidity in a productive way for shareholders. |
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HenryTo
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Location: Los Angeles, California
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| Posted: Fri Jan 21, 2011 12:41 pm Post subject: |
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Morningstar on COF's 4Q earnings:
| Quote: | | Capital One Financial COF earned $2.7 billion, or $6.01 per diluted share, in 2010, more than sixfold the level reported in the prior year. After besting our estimates for the first nine months of the year, results for the fourth quarter underperformed our estimates as fee income dropped faster than we had expected and operating expenses increased above our estimates. Despite these short-term trends, our long-term outlook for the firm remains unchanged and we are maintaining our fair value estimate. Credit quality improved slightly during the fourth quarter, with almost all loan categories experiencing a decline in delinquent loans and net charge-offs. The total delinquent loans/total loans ratio was 3.6% at year-end, down 11 basis points from the third quarter an d 53 basis from the prior year. The net charge-off rate dropped by 37 basis points from the previous quarter and 55 basis points from the prior year. Despite aggressive reserve releases during the year, the allowance for loan losses at year-end covered 125% of delinquent loans, providing a very conservative coverage level for 2011 and setting the stage for additional releases. We were encouraged by management's optimism regarding future loan growth, but at this point economic conditions preclude us from ramping up our assumptions. We have low expectations for revenue growth in 2011, although we think fee income hit bottom in 2010 and is likely to improve next year. Capital One ended the year with record levels of liquidity. As we've said before, the firm's capital levels and earnings support better deployment of its excess capital. Despite the recent runup in the stock price, we think buying back shares is still the best course of action, though management continues to chat about potential acquisitions. |
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