Capital One: 'Pleasantly Solid' Earnings Winner

NEW YORK ( TheStreet) -- Capital One ( COF) was the winner among the nation's largest banks on Friday, with shares rising 3% to close at $69.11.

The broad indices ended mixed, and the NASDAQ Composite index was down 1%, with Microsoft ( MSFT) sliding 11% to close at $31.40, after reporting disappointing second-quarter results late on Thursday.

Microsoft reported adjusted second-quarter earnings of 52 cents a share, declining from 73 cents a year earlier, and coming in way below the consensus estimate of 75 cents a share, among analysts polled by Thomson Reuters.

In economic news on Friday, China's central bank announced that it was removing the floor on loan interest rates for commercial banks, in an effort to encourage borrowing and business expansion.

The KBW Bank Index ( I:BKX) was up slightly to close at 66.04, with all but eight of the 24 index components up for the session.

Capital One

Capital One late on Thursday reported second-quarter net income available to common stockholders of $1.100 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. The year-earlier results also included a net $116 million in expenses from regulatory fines and customer refunds related to cross selling of "credit protection" services to its credit card customers.

The company's 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.

Results came ahead of the consensus estimates of $1.72 a share in earnings and revenue of $5.535 billion.

The main factor in the sequential earnings improvement was a decline in the provision for credit losses to $762 million in the second quarter from $885 million in 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.

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. In a very positive development, Capital One's net interest margin expanded by 12 basis points during the second quarter, to 6.83%.

KBW analyst Sanjay Sakhrani characterized Capital One's results as "pleasantly solid," with "no major surprises," and in a note to clients late on Friday added that although the bank's shares had rallied about 30% from their lows in March, "we still believe valuation levels remain attractive to peers."

Sakhrani rates Capital One "outperform," with a $79 price target for the shares.

Oppenheimer analyst Ben Chittenden also rates Capital One "outperform," and on Friday raised his price target for the shares to $78 from $72, writing in a client note that the second quarter was "a nice beat in its own right, but what we found even more interesting is that the company unveiled what it categorized as a "deal-adjusted" earnings number which they pinned at $2.18 (incl. reserve release)."

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

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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.