CAPITAL ONE FINANCIAL CORP quarterly report, Q2 FY2022

Capital One Financial Corporation — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Capital One is a diversified financial services holding company with Credit Card, Consumer Banking and Commercial Banking segments.

Financial performance and condition

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total net revenue	$8.232B	$7.374B	$16.405B	$14.487B
Net interest income	$6.517B	$5.743B	$12.914B	$11.565B
Provision for credit losses	$1.085B	$(1.160)B benefit	$1.762B	$(1.983)B benefit
Non-interest expense	$4.583B	$3.966B	$9.134B	$7.706B
Net income	$2.031B	$3.536B	$4.434B	$6.861B
Diluted EPS	$4.96	$7.62	$10.61	$14.65

• Margins and returns: Q2 net interest margin was 6.54%, up 65 basis points year over year; total net revenue margin was 8.25%, up 69 basis points. Return on average assets was 1.87%, compared with 3.34%.
• Credit and loans: Period-end loans held for investment were $296.4B, up $19.0B from December 31, 2021. Allowance for credit losses was $11.5B, or 3.88% of loans. Q2 net charge-offs were $845M; the annualized net charge-off rate was 1.18%. The 30+ day delinquency rate was 2.54% at quarter-end.
• Balance sheet and funding: Total assets were $440.3B; deposits were $307.9B; total debt, including securitized debt, was $58.9B. Stockholders’ equity was $53.4B. Cash and cash equivalents totaled $21.6B.
• Liquidity and capital: Liquidity reserves were $93.2B, down from $116.2B at year-end 2021. Average Q2 liquidity coverage ratio was 144%, above the 100% requirement; the company and banks also exceeded the NSFR requirement. CET1 ratio was 12.1% (11.6% excluding the CECL transition benefit).
• Cash flows, six months: Operating activities provided $2.9B; investing activities used $12.5B; financing activities provided $9.8B. Cash, cash equivalents and restricted cash increased $196M.

Material changes versus prior comparable periods

• Revenue rose, supported by loan growth, higher credit card margins and increased card purchase volume; net interest income increased 13% for the first half.
• Net income fell 43% in Q2 and 35% for the first half. The main drivers were credit-loss provision expense in 2022 versus large provision benefits in 2021, and higher expenses, particularly marketing.
• Marketing expense rose 62% in Q2 and 71% in the first half. Purchase volume increased 12% and 17%, respectively.
• Credit metrics showed gradual normalization: the overall Q2 net charge-off rate rose 30 basis points year over year, while the 30+ day delinquency rate increased 13 basis points from year-end.
• Loans held for investment grew 7% from year-end. Deposits declined $3.1B, while other debt rose $13.4B, mainly from increased FHLB advances.
• Higher interest rates and paydowns reduced the fair value of available-for-sale securities by $12.2B to $83.0B. First-half after-tax other comprehensive loss was $7.3B, and AOCI moved from $374M income at year-end to a $6.9B loss.

Outlook, management commentary, risks and unusual items

• Outlook: The filing provides no specific earnings or revenue guidance. Management said net interest income and margin may fluctuate with rates and balance-sheet mix, and described continued gradual credit normalization and economic uncertainty. Q2 rate sensitivity analysis projected modest net interest income increases under higher-rate scenarios and decreases under lower-rate scenarios; these are model estimates, not guidance.
• Capital returns: Capital One repurchased $2.0B of common stock in Q2 and $4.4B in the first half. The board authorized an additional $5.0B repurchase program beginning in Q3. First-half common dividends were $1.20 per share.
• Credit-loss estimates: The allowance increased modestly overall, while portfolio loan growth and economic uncertainty drove provision builds in Consumer and Commercial Banking. Actual losses may differ from estimates.
• Legal matters: Management estimated approximately $200M of reasonably possible future litigation losses beyond recorded reserves for matters where an estimate was possible; the filing cautions actual losses could exceed that amount. Cybersecurity-related proceedings continue. The U.S. consumer class-action settlement is within existing reserves and awaiting court approval; a Canadian class certification was preliminarily granted and appealed. The company also faces a securities class action and other inquiries.
• Other risks and commitments: Unfunded lending commitments totaled $402.9B, mainly credit card lines; these are contractual maximums and do not necessarily represent expected funding. Other key risks include economic deterioration, credit losses, deposit costs and competition, regulation, cybersecurity, market and interest-rate changes, and the transition from LIBOR. LIBOR commitments maturing after June 30, 2023 without fallback language totaled $14.1B.
• Unusual items: The IRS completed audits of tax years 2017–2019, resulting in a $358M payable previously recognized, with no impact on current-period consolidated statements. The 2022 supervisory stress capital buffer is 3.1% for October 2022–September 2023. Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.

Important facts for investors to verify

• Whether loan growth, higher purchase volume and card margins can offset rising funding costs and operating expenses.
• How credit normalization, delinquencies, charge-offs and allowance adequacy evolve, particularly in credit card and auto lending.
• Effects of further rate changes on net interest income, securities values, AOCI, deposits and liquidity.
• Capital levels and planned repurchases relative to the higher upcoming stress capital buffer and the company’s funding needs.
• Resolution and potential financial impact of cybersecurity litigation, interchange proceedings and other legal or regulatory matters.
• Progress in remediating remaining LIBOR contracts and the potential impact of the proposed FDIC deposit-insurance assessment increase.