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Capital One Beats as Credit Costs Decline

  • Second-quarter EPS of $1.87, increasing from $1.79 in Q1
  • EPS beats consensus estimate of $1.72
  • Net revenue up 2% sequentially and 14% year-over-year, to $5.638 billion
  • Net interest margin widens by 12 basis points from Q1
  • Provision for credit losses down $123 million from Q1

NEW YORK ( TheStreet) -- Capital One (COF - Get Report) on Thursday after the market close reported a significant decline in credit costs, with second-quarter results surprising to the upside of analysts' expectations.

The lender, based in McLean, Va., reported second-quarter net income available to common stockholders of $1.1 billion, or $1.87 a share, increasing from $1.048 billion, or $1.79 a share, in the first quarter, and $92 million, or 16 cents a share, during the second quarter of 2012, when the company completed its acquisition of HSBC's (HBC) U.S. credit card portfolio and set aside an additional $1.2 billion for loan loss reserves for the acquired loans. During the second quarter of 2012, the company also paid $60 million in regulator fines related to cross selling activities to its credit card customers, and set aside cash for customer refunds, for a total hit to the income statement of $116 million.

Capital One's total net revenue for the second quarter was $5.638 billion, increasing from $5.551 billion the previous quarter and $5.055 billion a year earlier.

Analysts polled by Thomson Reuters had estimated Capital One would post second-quarter earnings of $1.72 a share, on net revenue of $$5.535 billion.

Capital One is primarily a credit card lender, although commercial loans made up 21% of its total loans as of June 30. The company's decline in credit card balances this year has been widely publicized, and it previously announced a deal to sell its portfolio of $7 billion Best Buy credit card loans to Citigroup, with the loans transferred to held-for-sale during the first quarter.

During the second quarter, Capital One's average credit card loan balances declined by 6% from the first quarter to $77.946 billion. Meanwhile, the company's average commercial loans were up 2% during the quarter to $39.512 billion.

The following figures are all quarter-over-quarter, because year-earlier figures excluded a full quarter's effect of the HSBC card acquisition, which was completed late that quarter, and included the extraordinary provision for loan loss reserves for the acquired loans.

Second-quarter net interest income totaled $2.804 billion, declining from $2.830 billion in the first quarter, reflecting the decline in credit card balances. Capital One's net interest margin expanded by 12 basis points during the second quarter, to 6.83%.
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