Capital One Financial Corporation (NYSE: COF) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Capital One is a diversified financial services company operating Credit Card, Consumer Banking and Commercial Banking businesses.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total net revenue | $9.37B | $8.81B | $27.28B | $25.21B |
| Net interest income | $7.42B | $7.00B | $21.72B | $19.92B |
| Provision for credit losses | $2.28B | $1.67B | $7.57B | $3.43B |
| Net income | $1.79B | $1.69B | $4.18B | $6.13B |
| Diluted EPS | $4.45 | $4.20 | $10.28 | $14.84 |
| Net interest margin | 6.69% | 6.80% | 6.59% | 6.61% |
| Net charge-off rate | 2.56% | 1.24% | 2.53% | 1.18% |
Q3 net income rose 6%, with higher net interest income and revenue partly offset by increased credit-loss provision. Nine-month net income fell 32%, mainly because credit-loss provision more than doubled. Q3 efficiency ratio improved to 51.89% from 56.21%; total net revenue margin was 8.45% versus 8.55%.
- Balance sheet and funding: Total assets were $471.4B, loans held for investment $314.8B, deposits $346.0B and borrowings $49.2B at quarter-end. Since December 2022, loans grew 1%, deposits 4% and borrowings 1%. Average interest-bearing deposit cost rose to 3.30% from 1.00% year over year.
- Credit and reserves: Allowance for credit losses was $15.0B, or 4.75% of loans, up from $13.2B and 4.24% at year-end. The 30+ day delinquency rate increased to 3.71% from 3.21%. Credit card net charge-off rate was 4.42%, versus 2.25% a year earlier.
- Cash flow: For the first nine months, operating activities provided $13.5B, investing activities used $12.2B and financing activities provided $12.8B. Cash, cash equivalents and restricted cash increased $14.0B to $45.3B.
- Liquidity and capital: Liquidity reserves were $118.4B, up from $106.6B at year-end; average Q3 liquidity coverage ratio was 155%, above the 100% requirement, and average net stable funding ratio also exceeded 100%. CET1 was 13.0% (12.7% excluding the CECL transition benefit), up from 12.5% at year-end.
- Capital returns: Q3 common dividends were $232M and repurchases $150M. First-nine-month dividends were $702M and repurchases $450M.
Material changes and segment performance
- Credit Card revenue increased 15% year over year in Q3 to $6.63B, but provision rose 55% to $1.95B. Segment net income increased 10% to $1.27B in Q3, but fell 35% to $2.67B for the first nine months.
- Consumer Banking Q3 net income was $611M, down 2%. Auto originations fell 10% year over year in Q3; period-end auto loans declined 4% from year-end. Consumer deposits rose 7% from year-end to $290.8B.
- Commercial Banking Q3 net income declined 21% to $214M. Nine-month provision increased amid higher charge-offs in office real estate. Commercial loans declined 4% from year-end; nonperforming loan rate rose to 0.90% from 0.74%.
- Higher market rates increased funding costs: Q3 deposit interest expense was $2.61B versus $689M a year earlier. Net interest income nevertheless rose as asset yields and average card balances increased.
- Available-for-sale securities had $12.9B of gross unrealized losses at September 30, chiefly reflecting interest-rate-driven valuation declines. Accumulated other comprehensive loss was $12.2B, versus $9.9B at year-end.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management describes credit performance as continuing to normalize. Interest-rate sensitivity modeling indicates projected 12-month net interest income would rise modestly in the modeled up-rate scenarios and fall in down-rate scenarios; results depend on assumptions about deposits, growth and repricing.
- Credit trends are a key risk: rising card delinquencies and charge-offs, higher auto losses, and deterioration in commercial real estate, particularly office exposure. Commercial office real estate loans were $2.4B, down from $4.0B at year-end.
- Liquidity reserves increased as the company maintained elevated liquidity amid market volatility. Estimated uninsured deposits were $68.3B, about 20% of total deposits, down from $80.7B and 24% at year-end.
- Unfunded lending commitments totaled $439.2B, primarily credit card lines and other customer commitments; actual funding needs may be lower because commitments may expire undrawn.
- Management estimated approximately $200M of reasonably possible litigation losses beyond recorded reserves for matters where an estimate was possible; actual losses could exceed that estimate. Matters include interchange-fee litigation, Canadian claims relating to the 2019 cybersecurity incident, Walmart’s credit-card partnership dispute, and a new savings-account class action. The Federal Reserve lifted its cybersecurity-related consent order in July 2023; Canada’s privacy commissioner inquiry remains open.
- Proposed regulatory changes could affect capital requirements. The 2023 stress capital buffer is 4.8% for October 2023–September 2024. Proposed Basel III revisions and long-term debt requirements were not final; the company was assessing potential effects. Commercial Banking goodwill testing found no Q3 triggering event, but management said the estimated fair-value cushion had declined.
- The company adopted ASU 2022-02 on borrower modifications and vintage disclosures in 2023; it reported no material impact on consolidated financial statements. Adoption of ASU 2023-02, effective in 2024, was not expected to have a material impact.
Important facts for investors to verify
- Whether card delinquency and charge-off trends continue to normalize, and how credit costs compare with allowance levels.
- Office and broader commercial real estate exposures, criticized loans, nonperforming loans and subsequent charge-offs.
- Deposit mix, deposit pricing and uninsured-deposit levels, alongside the durability of reported liquidity reserves.
- Impact of unrealized securities losses, interest-rate movements and any regulatory changes on capital ratios and capital distributions.
- Developments and potential financial outcomes in the Walmart, savings-account, interchange and cybersecurity-related proceedings.