Saturday, July 28, 2012

Capital One Earnings Review: Quarter Wiped Out!

Capital One reported QE June 2012 financial results on Thursday, July 19

At first I thought I had made an error on my spreadsheet when there was not much left on the bottom line. Nope, performance was really that bad and trashed all the financial ratios. Good grief, Capital One crashed and burned in Q2. Financial position continues very strong, the brunt of the losses appear recognized, but some lesser, additional charges could occur.

A QoQ drop in net income and earnings per share was expected, after the Q1 incredible earnings per share of $2.72. A bargain purchase gain of $1.16 per share on the acquisition of ING Direct was included. Excluding this one-time gain resulted in a lower EPS of $1.56 in the prior quarter. That was the benchmark.

But this quarter's drop was deeper, damaging and caused by:
* $1.2 billion provision for credit losses for non-impaired loans (HSBC U.S. Card acquisition)
* $180 million representation and warranty expense to settle deceptive marketing litigation
* $98 million for net litigation reserves to cover interchange and other settlements
* $85 million of PCCR amortization (HSBC U.S. Card acquisition)
* $60 million in regulatory fines related to cross-sell activities in the Domestic Card business

Metric, QoQ Change, YoY Change
Total Assets: $296.57 billion, +1%, +48%
Net Revenues: $5.06 billion, +2%, +27%
Net Income: $93 million, -93%, -90%
Earnings per Share: $0.16, -94%, -92%

At QE 6-30-12 I have downgraded Capital One to an "A-" from an "A" at the prior QE 3-31-12. This is on a scale of A+ to G-. The median rating is "D" and the average rating was "C" at QE 3-31-12. Financial position strength is weighted more than financial performance. The QE 3-31-12 bank ratings review is here.

"While second quarter results reflect significant purchase accounting impacts and other items, the strong underlying performance of our businesses continues to demonstrate that we're well positioned to deliver sustained shareholder value," said Richard Fairbank, Chairman and Chief Executive Officer. "We're focused on delivering that value, including distributing capital to shareholders through a meaningful dividend and opportunistic share buybacks, consistent with our long-standing commitment to maintaining a strong and resilient capital base."


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