Capital One Financial Corporation (COF) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with fiscal 2022. Amounts are in U.S. dollars unless stated otherwise. Capital One is a diversified financial-services holding company with Credit Card, Consumer Banking and Commercial Banking segments.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total net revenue | $36.8 billion | $34.3 billion | Up 7% |
| Net interest income | $29.2 billion | $27.1 billion | Up 8% |
| Net income | $4.9 billion | $7.4 billion | Down 34% |
| Diluted earnings per common share | $11.95 | $17.91 | Down 33% |
| Provision for credit losses | $10.4 billion | $5.8 billion | Up 78% |
| Net interest margin | 6.63% | 6.67% | Down 4 basis points |
| Net charge-off rate | 2.70% | 1.36% | Up 134 basis points |
Revenue growth reflected higher loan balances and yields, plus increased interchange and treasury income. Higher deposit and other funding costs partly offset the increase in net interest income. Profit declined mainly because of increased credit-loss provision and expenses. Non-interest expense was $20.3 billion, up 6%; this included a $289 million FDIC special assessment in the fourth quarter. The effective tax rate was 19.2%, versus 20.3% in 2022.
- Credit Card: Segment revenue rose 15% to $25.7 billion; net income fell 30% to $3.5 billion. Average loans increased 18%, while the segment’s net charge-off rate rose to 4.57% from 2.53%.
- Consumer Banking: Segment revenue was $9.3 billion, down 1%, and net income was broadly unchanged at $2.3 billion. Auto loan originations fell 27%; the segment’s net charge-off rate rose to 1.76% from 1.06%.
- Commercial Banking: Segment revenue was $3.5 billion, down 2%, and net income fell 18% to $691 million. Provision expense increased, with management citing its office real estate portfolio.
Balance sheet, cash flow and capital
- Total assets were $478.5 billion, up 5% year over year. Loans held for investment were $320.5 billion, up 3%, led by credit-card growth.
- Total deposits were $348.4 billion, up 5%. Estimated uninsured deposits were $64.2 billion, or approximately 18% of deposits, versus $80.7 billion, or 24%, a year earlier.
- Debt comprised $18.0 billion of securitized debt and $31.8 billion of other debt, for approximately $49.9 billion in total. Stockholders’ equity was $58.1 billion.
- Cash and cash equivalents were $43.3 billion. Reported liquidity reserves were $120.7 billion, including available-for-sale securities and FHLB borrowing capacity. Fourth-quarter average liquidity coverage ratio was 167%; average net stable funding ratio for the third and fourth quarters was 135%.
- Operating cash flow was $20.6 billion; investing cash flow was negative $21.9 billion; financing cash flow was positive $13.8 billion. Cash, cash equivalents and restricted cash ended the year at $43.8 billion.
- Company CET1 capital ratio was 12.9% (12.6% excluding the remaining regulatory benefit of the CECL transition election); total capital ratio was 16.0%. The company and bank exceeded applicable capital requirements.
- Common dividends were $935 million, or $2.40 per share, and share repurchases were $600 million in 2023. The filing says the merger agreement restricts quarterly common dividends to no more than $0.60 per share until the proposed Discover transaction closes.
Material developments, outlook and risks
- Discover transaction: On February 19, 2024, after year-end, Capital One agreed to acquire Discover in an all-stock transaction. Discover shareholders are to receive 1.0192 Capital One shares per Discover share. Closing is subject to shareholder and regulatory approvals and other conditions. Capital One cautions that integration costs, delays, regulatory conditions and failure to realize expected benefits could be significant. Moody’s placed Capital One’s rating on review for downgrade following the announcement; S&P and Fitch reaffirmed their ratings.
- Credit and economic risks: Management reported credit normalization and higher delinquencies and charge-offs, particularly in domestic cards. Overall 30-plus-day delinquencies rose to 3.99% from 3.21%. Commercial real estate, including office exposure, is a risk area; 40.5% of commercial real estate loans were concentrated in the Northeast.
- FDIC assessment: The $289 million special assessment was recorded in 2023. The filing says possible amendments to the deposit data used in the calculation could result in up to a further $150 million of expense; the final amount also depends on FDIC loss estimates.
- Litigation and contingencies: Management estimated reasonably possible future losses beyond recorded reserves of approximately $200 million for certain matters where an estimate was possible, while noting actual losses could exceed that estimate. Matters include interchange litigation, the Walmart card-partnership dispute, Canadian litigation and an open Canadian privacy-regulator investigation relating to the 2019 cybersecurity incident, and savings-account class actions. The filing states that the 2019 incident’s U.S. regulatory consent orders have been terminated.
- Regulatory and operational risks: The filing highlights proposed changes to capital rules, a proposed CFPB credit-card late-fee rule, interchange-fee pressure, deposit-cost competition, cybersecurity and reliance on third-party technology providers. Capital One reported no material business, operating-results or financial-condition effect from cybersecurity threats, including prior incidents, but identifies these as ongoing risks.
- Outlook: The filing provides no specific company-wide earnings or revenue guidance. Management’s credit-loss estimate assumes U.S. unemployment gradually reaches approximately 4.4% by fourth-quarter 2024 and real GDP grows 1.0% in 2024; these are allowance assumptions, not formal guidance.
The auditor issued an unqualified opinion on the financial statements and internal controls. Management concluded internal control over financial reporting was effective and reported no material weaknesses.
Important facts for investors to verify
- Track subsequent card and auto delinquencies, charge-offs, loan growth and credit-loss reserves against the 2023 deterioration.
- Review deposit pricing, funding costs, uninsured-deposit levels and liquidity metrics, including whether elevated reserves remain sustainable.
- Assess office and broader commercial real estate performance, regional concentration and the related allowance.
- Monitor Discover transaction approvals, financing and dilution, integration expenses, regulatory conditions and expected synergies.
- Confirm the final FDIC special-assessment amount and developments in material litigation, including Walmart, interchange and cybersecurity-related matters.
- Compare reported capital ratios with future requirements, including the phase-in of CECL and any final Basel III rule changes.