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) 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%.

The company's provision for credit losses declined to $762 million during the second quarter from $885 million in the first quarter, directly boosting pre-tax earnings.

Second-quarter noninterest income was $1.805 billion, increasing from $981 million the previous quarter, with interchange fees on debit card purchases increasing to $486 million from $445 million in the first quarter.

Noninterest expense rose to $3.059 billion in the second quarter from $3.028 billion the previous quarter.

Capital One CEO Richard Fairbank said in the company's earnings release that "We delivered solid performance across each of our businesses during the quarter, and we continue to generate significant capital," adding the company would "continue to tightly manage costs and credit quality, drive resilient growth in businesses we are emphasizing, and focus on returning capital to our investors to deliver sustained shareholder value."

Capital One reported a Basel I tier 1 common equity ratio of 12.1% as of June 30, and said its estimated Basel III Tier 1 common equity ratio was above its "assumed target" of 8.0%.

Capital One's shares were up 1.4% in after-market trading, to $67.05.

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

>Contact by Email.

-- 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 TheStreet.com 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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