Fourth-quarter net interest income was $4.528 billion, declining from $4.646 million in the third quarter, but increasing from $3.182 billion in the fourth quarter of 2011, reflecting the ING Direct acquisition, as well as the company's purchase of
domestic credit card portfolio during the second quarter of last year.
The net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- was 6.52%, declining sharply from 6.97% in the third quarter. Capital One said "the higher levels of estimated uncollectible finance charges and fees coupled with a substantial increase in the proportion of lower-yielding cash and investment securities in anticipation of the call of high coupon trust securities resulted in a decrease in net interest margin of 45 basis points to 6.52 percent." A sequential decline in the company's cost of funds of seven basis points to 0.99% partially mitigated the margin squeeze.
Operating expenses during the fourth quarter totaled $2.862 billion, increasing from $2.729 billion the previous quarter, "driven by higher year-end expense patterns and somewhat higher integration expenses." Marketing expenses also increased, to $393 million in the fourth quarter, from $316 million in the third quarter.
As part of its 2013 guidance, Capital One said "Overall, the company expects non-interest expense [including the operating expense and marketing expense] to be, on average, just over $3.1 billion per quarter, reflecting a modest decline in quarterly expenses relative to seasonally elevated operating and marketing costs in the fourth quarter of 2012."
Capital One CEO Richard Fairbank said the company was "well positioned to deliver sustained shareholder value through sure-footed execution, substantial capital generation, and disciplined capital allocation for the benefit of our shareholders," adding that "as a first step, we expect to return to a meaningful dividend in 2013, following the completion of the current [Federal Reserve stress test] process."
Brad Lamensdorf, a portfolio manager for the
AdvisorShares Ranger Equity Bear ETF
says that his fund had already sold Capital One short, as the company "has very weak earnings quality which is what we try to focus on."
"They have gotten a lot of high margin fees in the past, but individuals have been cutting their card balances quite a bit. Meanwhile, at a time of historically low interest rates, customers are moving to other places that have lower rates, which is hurting Capital One's margins," he said.
Lamensdorf added that "Capital One doesn't break out its fee income in great detail, but we have a firm feeling that they have been enjoying very high penalty fees, which are starting to come down."
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Written by Philip van Doorn in Jupiter, Fla.