COF Sailing Along Into Q3

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Capital One Financial Corporation reported net income of $1.1 billion or $1.87 per diluted share in the second quarter of 2013, compared with $1.0 billion or $1.79 per diluted share last quarter, and $92 million in second-quarter 2012. Last year’s results reflected significant purchase accounting impacts as Capital One closed the acquisition of HSBC U.S. card business. The largest impact was the larger loan loss provision, which totaled $1.7 billion in second-quarter 2012 compared with $762 million for second-quarter 2013.

Net interest margin continued to improve to 6.83% for second-quarter 2013 compared with 6.71% for first-quarter 2013, as lower interest-earning assets declined by 2% on a linked-quarter basis with low-yielding mortgage loans acquired from the ING Direct acquisition continuing to run off. This resulted in less need for interest-bearing funding, which declined 3% on a linked-quarter basis. Total deposit funding declined in the quarter, totaling $209.8 billion compared with $212.5 billion last quarter.

Overall funding costs declined to 0.81% for second-quarter 2013 compared with 1.06% for second-quarter 2012. In terms of loan growth, credit card loans struggled to increase from current levels. Meanwhile, automobile lending grew $1.4 billion during the quarter or 5% on a linked-quarter basis.

However, Capital One is seeing significant competition in automotive lending and expects origination volumes to stabilize to $16-$17 billion on an annualized basis. In addition, net charge-offs from this category are expected to increase to more-normalized levels in the coming quarters.

Commercial banking had another strong quarter as loans grew 4% on a linked-quarter basis driven primarily by middle-market commercial and industrial as well as commercial real estate loans. At this point, we anticipate that commercial loan growth will continue to be strong for the remainder of 2013.

Overall net charge-off levels declined to 2.03% for secondquarter 2013 compared with 2.20% last quarter owing to lower automotive and commercial banking net charge-offs. While we are encouraged by these credit trends and anticipate that lower provisions for credit losses will continue, we do not think these low net charge-off levels are sustainable.

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