Capital One: Seasonal Flu Loser

NEW YORK ( TheStreet) -- Capital One ( COF) was the big loser among the largest U.S. banks on Friday, with shares taking q 7.5% pounding to close at $56.99.

As large U.S. banks continued to announce their fourth-quarter results, KBW Bank Index ( I:BKX) was down slightly to close at 53.48. When speaking about Bank of America ( BAC), with shares rising over 100% last year, Jim Cramer said it was time for investors to "scale back" on the "very crowded money center play," and rotate to the stronger regional banks. Cramer said that KeyCorp ( KEY) "may be the most undervalued stock that we own" for the Action Alerts Plus charitable portfolio.

"Find a regional you are comfortable with," Cramer said, and "unwind the trade of long money center/short regional."

Shares of Bank of America were down over 1% to close at $11.14.

"Seasonal Patterns," but Lower 2013 Guidance

Following Thursday's market close, Capital One reported fourth-quarter net income available to common stockholders of $825 million, or $1.41 a share, missing the consensus estimate of $1.59, among analyst polled by Thomson Reuters.

In comparison, the company earned $1.173 billion, or $2.05 a share, in the third quarter, and $381 million, or 89 cents a share, in the fourth quarter of 2011, when Capital One incurred unusually high expenses at it prepared for its first-quarter acquisition of ING Direct (USA).

Capital One CFO Gary Perlin attributed the sequential earnings decline to "seasonal expense and margin trends," but also said that "with a few exceptions largely related to these seasonal patterns, fourth quarter 2012 results give us a good picture of what to expect in terms of pre-provision earnings in 2013, assuming little change in the external environment."

The company's fourth-quarter revenue was $5.624 billion, declining from $5.782 billion in the third quarter, "almost entirely driven by higher levels of estimated uncollectible finance charges and fees in the company's Domestic Card business."

Capital One's fourth-quarter provision for loan losses was $1.151 billion, increasing from $1.014 billion the previous quarter, and $861 million a year earlier. The company said that the provision increased form the third quarter because fewer nonperforming loans acquired through acquisitions were absorbed by credit marks previously taken.

The company's annualized ratio of net charge-offs to average loans increased to 2.26% in the fourth quarter from 1.75% in the third quarter, "largely because of the diminishing impact of the credit mark," while the net charge-off rate for credit card loans increased to 4.35% from 3.04%, "also driven by seasonality and the diminishing impact of the credit mark."

Oppenheimer analyst Chris Kotowski rates Capital One "Outperform," but on Friday lowered his with a 12-18 price target for the shares by three dollars to $68, and said in a note that "for the second year in a row COF threw an air ball in 4Q. Last year it was a stunning expense bulge and this time it was not so much the 4Q results themselves but the guidance that pre-provision earnings would be flattish with the 4Q level in 2013 and that it did not plan to ask the Fed for any share repurchases in this year's stress test process."

"Nevertheless," Kotowski said that "in cases like this we find it best to put the emotion aside and do our numbers, and they point us to a still compelling but lower $68 price target on our downwardly revised $6.50 estimate, and thus we maintain our Outperform."

Kotowski lowered his 2013 EPS estimate from $7.03. His 2014 EPS estimate is $7.15.

Capital One's shares now trade for 8.5 times the consensus 2013 EPS estimate of $6.67. the consensus 2014 EPS estimate is $7.05.

Orips Research CEO Zev Spiro says that the technical picture for Capital One's shares isn't all bad: "The end of a primary uptrend was signaled today for Capital One, via a high volume downward gap that broke below a bullish support line that began in 2011. The break indicates a shift in the primary trend from positive to neutral. Both the breakaway gap and accompanying high volume add confidence to the signal. On a positive note, prices tested and held the 200-Day Simple Moving Average, currently at $56.26, a level that recently halted a sharp decline in November 2012. Portfolios should monitor significant support in the $55/$56 area as a confirmed break below support could signal additional risk."

Interested in more on Capital One? See TheStreet Ratings' report card for this stock.

State Street Impresses

State Street ( STT) of Boston was Friday's financial winner, with shares rising 6% to close at $53.36, after the company reported fourth-quarter earnings available to common shareholders of $521 million, or $1.11 a share, beating the consensus estimate of a dollar a share, among analysts polled by Thomson Reuters.

Operating earnings grew from $473 million, or 99 cents a share, in the third quarter, and $454 million, or 93 cents a share, in the fourth quarter of 2011.

Fourth-quarter GAAP earnings available to common shareholders were $468 million, or a dollar a share, and included acquisition and restricting costs totaling $139 million, "primarily related to severance and benefits costs for targeted staff reductions expected to be substantially completed during 2013," which is expected to result in 630 staff positions being eliminated.

State Street's management fees on an operating basis grew 4% sequentially and 29% year-over-year, to $260 million in the fourth quarter, with the year-over-year increase "primarily due to stronger equity markets, net new business, and higher performance fees."

Please see TheStreet's earnings coverage for much more detail on State Street's fourth-quarter results.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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