10-QPeriod: Q3 FY2012

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q3 Ended Sep 30, 2012

Filed November 8, 2012For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation (COF) reported a strong third quarter of 2012, with net income reaching $1.178 billion ($2.01 per diluted share) on total net revenue of $5.782 billion. This represents a significant increase compared to the prior year's quarter, largely driven by the full-quarter impact of the ING Direct and HSBC U.S. card acquisitions, which boosted total net revenue and customer accounts. Despite increased provision for credit losses and non-interest expenses stemming from these acquisitions, the company saw robust earnings growth across all its business segments: Credit Card, Consumer Banking, and Commercial Banking. The company's capital position also strengthened, with its Tier 1 risk-based capital ratio at 12.7% and Tier 1 common ratio at 10.7% as of September 30, 2012. This improvement was attributed to strong internal capital generation and the issuance of preferred stock. Management expressed confidence in the company's strategic positioning, highlighting the expanded customer base and revenue growth potential, even in a challenging economic environment characterized by low interest rates. The company also provided an outlook for 2013, anticipating a modest decline in average loans due to portfolio run-offs but expecting continued strong returns and capital generation.

Financial Highlights

39 data points
Beta

Revenue

$5.78B

Net Income

$1.18B

20.4% Net Margin

EPS (Diluted)

$2.01

Total Assets

$301.99B

Free Cash Flow

$4.89B

Financial Statements
Beta
Revenue$5.78B
Operating Income$2.89B
Interest Expense$608.00M
Net Income$1.18B
EPS (Basic)$2.03
EPS (Diluted)$2.01
Shares Outstanding (Basic)578.30M
Shares Outstanding (Diluted)584.10M

Key Highlights

  • 1Net income for Q3 2012 was $1.178 billion, a 45% increase year-over-year, driven by strong revenue growth from recent acquisitions.
  • 2Total net revenue surged by 39% year-over-year to $5.782 billion, largely due to the full integration of ING Direct and HSBC U.S. card businesses.
  • 3Provision for credit losses increased by 63% year-over-year to $1.014 billion, primarily reflecting the allowance build for acquired HSBC U.S. card loans.
  • 4Non-interest expense rose by 33% year-over-year to $3.045 billion, impacted by acquisition-related expenses, integration costs, and amortization of intangibles.
  • 5Period-end loans held for investment grew by 49% to $203.1 billion, largely due to the ING Direct and HSBC U.S. card acquisitions.
  • 6Capital ratios improved, with Tier 1 risk-based capital at 12.7% and Tier 1 common ratio at 10.7%, supported by capital raises and strong internal generation.
  • 7The company provided a cautious outlook for 2013, expecting a modest decline in average loans due to portfolio run-off, but maintaining confidence in sustained strong returns and capital generation.

Frequently Asked Questions

The primary driver of Capital One's earnings growth in Q3 2012 was the full-quarter impact of the ING Direct and HSBC U.S. card acquisitions. These acquisitions significantly boosted total net revenue and expanded the customer base, more than offsetting increased expenses and provisions related to the transactions.

The acquisitions led to a substantial increase in Capital One's balance sheet. Total assets grew by 47% to $302.0 billion, primarily driven by the acquired loans and other assets. Total deposits also saw a significant rise of 66% to $213.3 billion, largely due to ING Direct's deposit base.

Capital One anticipates a modest decline in average loans for the full year 2013 due to the expected run-off of portfolios acquired in the HSBC and ING Direct transactions. While net charge-off rates in the Credit Card segment are expected to increase in Q4 2012 due to the absorption of the 'credit mark' on acquired loans, the company expects overall credit performance to stabilize and remain manageable, influenced by seasonal trends.

Capital One's capital ratios improved during the quarter. The Tier 1 risk-based capital ratio increased to 12.7% from 11.6% at the end of Q2 2012, and the Tier 1 common ratio rose to 10.7% from 9.9%. These improvements were driven by strong internal capital generation and the issuance of $853 million in perpetual preferred stock.