Capital One Financial Corporation (COF) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Capital One is a diversified financial services company with Credit Card, Consumer Banking and Commercial Banking segments. Comparisons below are against 2022 unless noted.
Financial performance and condition
| Metric | Q2 2023 | Change vs. Q2 2022 |
|---|---|---|
| Total net revenue | $9.0 billion | +9% |
| Net interest income | $7.1 billion | +9% |
| Provision for credit losses | $2.5 billion | +129% |
| Non-interest expense | $4.8 billion | +5% |
| Net income | $1.4 billion | −30% |
| Diluted EPS | $3.52 | −29% |
| Net interest margin | 6.48% | −6 bps |
| Efficiency ratio | 53.20% | Improved 247 bps |
For the first six months, revenue was $17.9 billion (+9%), net income was $2.4 billion (−46%), and diluted EPS was $5.83 (−45%). Higher credit-loss provisions were the main earnings headwind; higher net interest income partly offset the impact.
- Segment results, Q2 net income: Credit Card $857 million (−43%); Consumer Banking $709 million (+37%); Commercial Banking $200 million (+32%); Other recorded a $335 million loss.
- Balance sheet at June 30: Total assets were $467.8 billion; loans held for investment were $311.3 billion, substantially flat from year-end 2022. Deposits totaled $343.7 billion (+3% from year-end), and total debt was $50.3 billion (+3%).
- Liquidity and capital: Liquidity reserves were $118.0 billion, up $11.4 billion from year-end. Average Q2 liquidity coverage ratio was 150% and average net stable funding ratio was 134%, each above the 100% requirement. CET1 capital ratio was 12.7% (12.4% excluding the CECL transition benefit); tangible common equity ratio was 7.6%.
- Cash flows, first six months: Operating activities generated $6.3 billion; investing activities used $7.2 billion; financing activities generated $11.6 billion. Cash, cash equivalents and restricted cash increased by $10.8 billion to $42.0 billion.
- Capital returns: The company paid $470 million in common dividends and repurchased $300 million of common stock in the first half. Q2 common dividend was $0.60 per share.
Material changes and credit trends
- Net charge-offs rose to $2.2 billion in Q2; the company-wide net charge-off rate increased to 2.82% from 1.18%. The credit card rate was 4.41%, up from 2.34%; the auto rate was 1.40%, up from 0.61%.
- The allowance for credit losses increased to $14.6 billion from $13.2 billion at year-end, and allowance coverage rose to 4.70% from 4.24%. The increase reflected credit card allowance building and higher charge-offs amid continued credit normalization.
- The total 30+ day delinquency rate increased to 3.36% from 3.21% at year-end. Commercial Banking’s Q2 net charge-off rate rose to 1.62%, primarily due to office real estate charge-offs; commercial nonperforming loan rate rose to 0.89%.
- Period-end credit card loans increased 3% from year-end to $142.5 billion. Consumer Banking loans fell 3% to $77.3 billion, with auto originations down 31% in Q2. Commercial Banking loans fell 3% to $91.6 billion.
- Deposit growth was driven by the national banking strategy, including limited-time time-deposit offerings. Average interest-bearing deposit cost increased to 2.91% in Q2 from 0.44% a year earlier.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management notes results may vary with credit performance, interest rates, deposit costs, funding mix and economic conditions.
- The preliminary stress capital buffer requirement for October 2023–September 2024 was 4.8%, versus 3.1% for the current period; the final requirement was pending. The resulting preliminary minimum ratios including the buffer were 9.3% CET1, 10.8% Tier 1 and 12.8% total capital.
- Interest-rate sensitivity estimates show projected 12-month net interest income increasing 0.8% under a +200 bp shock and decreasing 2.5% under a −200 bp shock. Estimated economic value of equity decreases 5.2% under +200 bp. These are model-based estimates subject to assumptions and limitations.
- Uninsured deposits were estimated at $71.5 billion, about 21% of deposits, down from $80.7 billion and 24% at year-end. The FDIC had proposed a special assessment related to the protection of uninsured depositors at failed banks; the filing did not quantify Capital One’s eventual assessment.
- Walmart sued seeking a declaration that it could terminate its credit-card partnership early and alleging breach of contract; Capital One denied Walmart’s termination right and asserted counterclaims. For disclosed matters where an estimate was possible, management estimated reasonably possible future losses beyond recorded reserves of approximately $200 million. Actual losses could exceed the estimate; some matters could not be estimated.
- Available-for-sale securities had $10.2 billion of gross unrealized losses at quarter-end, predominantly agency mortgage-backed securities. Management reported no securities sales in the first half of 2023.
- The company adopted ASU 2022-02 on loan modifications and disclosures; it reported no material impact on its financial statements. It did not expect the pending tax-credit investment accounting standard to have a material impact.
Important facts for investors to verify
- Whether credit card and auto delinquencies, charge-offs and allowance coverage continue to rise, and how those trends affect provisions and earnings.
- Office real estate exposure and losses, including the impact of the reclassified $888 million of office loans held for sale.
- Deposit pricing, time-deposit mix, uninsured deposit levels and the effect of any FDIC special assessment on funding costs.
- The final stress capital buffer requirement, proposed Basel capital rule changes, and implications for capital distributions and repurchases.
- Developments in the Walmart partnership litigation and other legal matters, including whether losses exceed existing reserves and disclosed estimates.