10-QPeriod: Q1 FY2023

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q1 Ended Mar 31, 2023

Filed May 5, 2023For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation (COF) reported a significant year-over-year decline in net income for the first quarter of 2023, down 60% to $960 million, or $2.31 per diluted share, compared to $2.4 billion, or $5.62 per diluted share, in Q1 2022. This drop was primarily driven by a substantial increase in the provision for credit losses, reflecting continued credit normalization and an anticipated economic downturn, which more than offset a 12% increase in net interest income. Total net revenue rose 9% to $8.9 billion, mainly due to higher average loan balances in the credit card portfolio, but this was outpaced by an 11% increase in non-interest expense, largely attributed to higher salaries and benefits. The company's balance sheet saw a 4% increase in total assets to $471.7 billion, driven by higher cash balances and investment securities. Total deposits grew by 8% to $349.8 billion, supporting the company's national banking strategy. Capital ratios remained strong, with Common Equity Tier 1 (CET1) capital at 12.5%, meeting regulatory requirements. However, the increase in the net charge-off rate to 2.21% and a growing allowance for credit losses (up 8% to $14.3 billion) signal increasing credit risk in the portfolio, particularly within the Credit Card segment where net charge-offs more than doubled year-over-year. Investors should monitor credit quality trends closely in the coming quarters as economic conditions evolve.

Financial Highlights

42 data points
Beta

Revenue

$8.90B

Net Income

$960.00M

10.8% Net Margin

EPS (Diluted)

$2.31

Total Assets

$471.66B

Cash & Equivalents

$46.97B

Free Cash Flow

$2.76B

Financial Statements
Beta
Revenue$8.90B
Operating Income$960.00M
Interest Expense$2.57B
Net Income$960.00M
EPS (Basic)$2.32
EPS (Diluted)$2.31
Shares Outstanding (Basic)382.60M
Shares Outstanding (Diluted)383.80M

Key Highlights

  • 1Net income decreased by 60% to $960 million in Q1 2023 from $2.4 billion in Q1 2022, primarily due to a higher provision for credit losses.
  • 2Total net revenue increased by 9% to $8.9 billion, driven by higher average loan balances in the credit card portfolio, though net interest margin slightly improved by 11 bps to 6.60%.
  • 3Provision for credit losses surged by 314% to $2.8 billion, reflecting credit normalization and expectations of economic worsening.
  • 4Net charge-off rate increased significantly by 110 bps to 2.21%, with the Credit Card segment's net charge-off rate rising by 188 bps to 4.06%.
  • 5Allowance for credit losses increased by 8% to $14.3 billion, with the allowance coverage ratio rising to 4.64%, indicating a more cautious stance on potential credit losses.
  • 6Non-interest expense rose by 9% to $4.9 billion, largely due to increased salaries and associate benefits.
  • 7Capital ratios remained robust, with CET1 capital at 12.5%, and total deposits grew by 8% to $349.8 billion.

Frequently Asked Questions

The primary driver for the 60% year-over-year decrease in net income was a substantial increase in the provision for credit losses. This was due to continued credit normalization and an assumed economic worsening, leading to a significant build-up in the allowance for credit losses, particularly in the credit card portfolio.

Loan portfolio performance showed signs of stress. The net charge-off rate across the company increased significantly to 2.21% from 1.11% in the prior year. The credit card segment experienced a particularly sharp rise in its net charge-off rate to 4.06%. Concurrently, the allowance for credit losses increased by 8% to $14.3 billion, reflecting management's expectation of higher future credit losses.

Capital One's net interest margin slightly improved by 11 basis points to 6.60% in Q1 2023. This was driven by higher yields on credit card and commercial banking loans, which benefited from rising interest rates. However, this positive impact was partially offset by higher interest rates paid on interest-bearing deposits, as the company increased deposit rates to attract funding.

Capital One maintained strong capital ratios, with its Common Equity Tier 1 (CET1) capital ratio at 12.5%, well above regulatory minimums. Total deposits increased by 8% to $349.8 billion, demonstrating the effectiveness of their national banking strategy in attracting funding. The company also reported a robust Liquidity Coverage Ratio (LCR) of 148%, indicating ample liquidity reserves.