01—Abstract
Summary
Summary of the 10-K filed February 27, 2014. Cited figures are marked; the original filing is the authoritative source.
Capital One Financial Corp. (COF) reported 2013 net income of $4.2 billiona ($6.96 per diluted share) on total net revenue of $22.4 billion, up from $3.5 billion and $6.16 per diluted share in 2012.
Growth was driven by the absence of 2012's $1.2 billionb one-time credit card reserve build tied to the HSBC U.S. card acquisition, higher net interest income from the full-year effect of the ING Direct and HSBC acquisitions, and auto lending growth. The results were partly offset by lower non-interest income, which fell 11% after 2012's $594 million bargain purchase gain and $162 million Visa stock sale did not recur. Balance sheet and capital quality improved.
The Basel I Tier 1 common ratio rose to 12.23% from 10.96%, helped by strong earnings retention and the run-off of assets sold in the $6.4 billionc Best Buy card portfolio sale to Citibank. Period-end loans held for investment declined 4% to $197.2 billion, and the allowance for loan losses fell to $4.3 billion (2.19% coverage). Credit quality was mixed: the reported net charge-off rate rose to 2.04% from 1.89% largely because acquired loans run off and are replaced with originated loans carrying no credit mark, while the 30+ day delinquency rate improved to 2.96% from 3.09%.
Management guided to 2014 pre-provision net revenue of about $9.8 billiond and operating expenses of about $10.5 billion, with very modest revenue growth. Key risks flagged in the filing include the Federal Reserve's stricter 2014 CCAR stress-test regime (including the use of Basel III Standardized capital), the Basel III and Advanced Approaches capital rules, a $1.2 billion representation and warranty reserve for legacy mortgage repurchase claims (with an estimated $2.6 billion of reasonably possible additional losses), the Interchange Litigation settlement pending appeal, and ongoing state attorney general and payment protection product investigations. The company also repurchased $1 billion of stock in 2013, completing the program in the fourth quarter.
02—Key points
Key Highlights
- Net income rose 18% to $4.2 billion; diluted EPS rose 13% to $6.96, helped by the absence of 2012's $1.2 billion acquired-card reserve build
- Net interest income grew 9% to $18.1 billion, with net interest margin up 30 basis points to 6.80% on a lower cost of funds
- Non-interest income fell 11% to $4.3 billion because 2012's $594 million bargain purchase gain and $162 million Visa share sale did not recur
- Tier 1 common ratio (Basel I) increased to 12.23% from 10.96%, despite a $1 billion buyback and the Best Buy portfolio sale
- Net charge-off rate rose to 2.04%, though 30+ day delinquencies fell to 2.96%; the rise partly reflects run-off of acquired loans carried at fair value
- 2014 guidance: pre-provision net revenue of about $9.8 billion and operating expenses of about $10.5 billion, with very modest revenue growth
- Representation and warranty reserve rose to $1.2 billion, with an estimated $2.6 billion of reasonably possible additional losses
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 27, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $22.38B$21.40B | +4.6% |
| Operating Income | $4.35B$3.71B | +17.4% |
| Interest Expense | $1.79B$2.38B | −24.5% |
| Net Income | $4.12B$3.49B | +18.0% |
| EPS (Basic) | $6.99$6.17 | +13.3% |
| EPS (Diluted) | $6.89$6.11 | +12.8% |
| Shares Outstanding (Basic) | 579.70M561.10M | +3.3% |
| Shares Outstanding (Diluted) | 587.60M566.50M | +3.7% |
05—Questions
Frequently Asked Questions
How profitable was Capital One in 2013 and what drove the change from 2012?
Net income was $4.2 billion, or $6.96 per diluted share, compared with $3.5 billion and $6.16 in 2012. The main drivers were lower provisions (no repeat of the $1.2 billion credit card reserve build from the HSBC acquisition), higher net interest income from acquired portfolios, and auto loan growth. These were partly offset by the loss of one-time 2012 gains and higher operating expenses.
Is Capital One's capital position stronger or weaker?
It is stronger on the reported Basel I measure. The Tier 1 common ratio rose to 12.23% from 10.96%, supported by retained earnings and a smaller balance sheet after the Best Buy card portfolio sale. However, the company must move to Basel III Standardized rules in 2015 and may need more capital under the Advanced Approaches framework, and the Federal Reserve's 2014 stress tests could limit planned buybacks.
Why did the charge-off rate increase even though delinquencies fell?
Acquired loans from the ING Direct and HSBC card deals were recorded at fair value, and their credit losses are absorbed by a discount rather than charged off. As those loans run off and are replaced by originated loans without that discount, reported charge-offs rise. Delinquencies, which exclude acquired loans in the adjusted metrics, improved to 2.96% from 3.09%.
What are the main legal and regulatory risks investors should watch?
Key items include mortgage repurchase and representation-and-warranty litigation tied to 2005-2008 vintage loans from GreenPoint and Capital One Home Loans, the Interchange Litigation settlement (under appeal), state attorney general suits over payment protection products, and the Dodd-Frank rules affecting debit interchange fees and CFPB oversight of consumer lending.
What is the outlook for 2014?
Management expects pre-provision net revenue of about $9.8 billion and operating expenses of about $10.5 billion, with very modest revenue growth after adjusting for the Portfolio Sale. Domestic card loan growth is expected to resume around the second half of 2014, while the company expects continued run-off of acquired home loans and rising auto credit losses from historically low levels.
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