Capital One Financial Corporation (COF) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Comparisons are primarily with Q1 2019 for income-statement results and December 31, 2019 for balance-sheet metrics. Amounts are U.S. dollars.
Business context and reporting period
Capital One is a diversified financial-services company operating through Credit Card, Consumer Banking and Commercial Banking segments. The quarter was substantially affected by the COVID-19 pandemic, market volatility and adoption of the CECL expected-credit-loss standard on January 1, 2020.
Key financial metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable period |
|---|---|---|
| Total net revenue | $7.249 billion | $7.083 billion in Q1 2019, up 2% |
| Net interest income | $6.025 billion | $5.791 billion in Q1 2019, up 4% |
| Net interest margin | 6.78% | 6.86% in Q1 2019 |
| Provision for credit losses | $5.423 billion | $1.693 billion in Q1 2019 |
| Net income (loss) | $(1.340) billion; diluted EPS $(3.10) | $1.412 billion; diluted EPS $2.86 in Q1 2019 |
| Non-interest expense | $3.729 billion | $3.671 billion in Q1 2019 |
| Net charge-offs / rate | $1.791 billion / 2.72% | $1.599 billion / 2.64% in Q1 2019 |
| Loans held for investment | $262.990 billion | $265.809 billion at Dec. 31, 2019 |
| Allowance for credit losses | $14.073 billion; 5.35% of loans | $7.208 billion; 2.71% at Dec. 31, 2019 |
| Total assets / stockholders’ equity | $396.878 billion / $56.830 billion | $390.365 billion / $58.011 billion at Dec. 31, 2019 |
| Deposits / borrowings | $269.689 billion / $55.681 billion | $262.697 billion / $55.697 billion at Dec. 31, 2019 |
| Common Equity Tier 1 ratio | 12.0% | 12.2% at Dec. 31, 2019 |
Cash flow: Operating activities provided $5.409 billion; investing activities provided $1.041 billion; financing activities provided $5.101 billion. Cash, cash equivalents and restricted cash increased by $11.551 billion during the quarter. Liquidity reserves were $105.906 billion, and the average Q1 liquidity coverage ratio was 145%, above the 100% regulatory requirement.
Material changes versus comparable periods
- The $3.730 billion increase in provision for credit losses was the principal driver of the shift from profit to loss. Management cited expected economic deterioration and uncertainty related to COVID-19, as well as deterioration in the commercial energy portfolio.
- CECL adoption added $2.845 billion to credit-loss reserves and reduced retained earnings by $2.184 billion after tax; a separate $462 million credit-card finance-charge and fee reserve was reclassified into the allowance. The reported allowance increase also included the quarter’s subsequent reserve build.
- Net interest income rose with loan growth and lower deposit and borrowing costs, partly offset by lower asset yields. Net interest margin fell 8 basis points year over year.
- Loans declined $2.819 billion from year-end: seasonal paydowns and lower late-quarter card purchase volume outweighed commercial client drawdowns. Total assets rose $6.513 billion, mainly from higher cash and commercial loans.
- Segment results turned negative: Credit Card lost $991 million (versus $751 million income), Consumer Banking lost $52 million (versus $468 million income), and Commercial Banking lost $411 million (versus $146 million income). Credit Card and Consumer Banking losses largely reflected higher provisions; Commercial Banking was also affected by commercial energy credit deterioration.
- Net charge-off rate increased 8 basis points year over year, while the 30+ day delinquency rate fell to 3.16% from 3.74% at year-end. The filing attributes the decline partly to seasonality and customer payment extensions; it should not be read as conclusive evidence of improving underlying credit quality.
Outlook, management commentary, risks and unusual items
- Management withdrew its 2021 operating efficiency ratio guidance, including the 42% target, and withdrew full-year 2020 marketing guidance. It said near-term marketing would be reduced, subject to changing market conditions.
- COVID-19 assistance included card payment deferrals and fee waivers, auto payment extensions and paused involuntary repossessions, and customized commercial accommodations. As of March 31, deferrals covered less than 1% of card customers (about $800 million of loans); auto extensions covered about 4% of customers (about $3 billion); commercial deferrals covered about $130 million. Enrollment had increased by April 17.
- Share repurchases were suspended on March 13 after $312 million of Q1 repurchases. Management said it expected to maintain the $0.40 quarterly common dividend, subject to Board approval. The company also issued $1.2 billion net proceeds of Series J preferred stock and redeemed Series B preferred stock; the redemption added $22 million to the loss available to common shareholders.
- Cybersecurity incident expenses were $14 million in Q1, offset by $10 million of insurance recoveries. Cumulative incremental expenses were $86 million, offset by $44 million in recoveries. The company expected costs at the low end of its previously disclosed $100–$150 million range, excluding insurance reimbursements; legal and reputational impacts remained uncertain.
- Management reported approximately 73 putative consumer class actions related to the 2019 data incident and ongoing governmental inquiries. It estimated reasonably possible litigation losses beyond recorded reserves at approximately $1.2 billion where estimable; actual losses could exceed that estimate. The U.K. PPI reserve was $85 million, with approximately $50 million of reasonably possible future losses beyond the reserve.
- Other key risks include the uncertain duration and economic effects of COVID-19, credit-loss estimation uncertainty, interest-rate and liquidity conditions, commercial energy exposures, cybersecurity and litigation, and the transition away from LIBOR. Management said goodwill fair values remained substantially above carrying values at quarter-end but would continue to be monitored.
Important facts for investors to verify
- How subsequent economic conditions, unemployment and customer payment behavior affect credit-loss provisions, allowance levels, charge-offs and delinquencies.
- How CECL adoption and the COVID-related reserve build are separated in later disclosures, and whether the March 31 allowance remains adequate as forecasts change.
- Whether customer assistance enrollment, purchase volumes, auto originations and commercial line drawdowns affect revenue, loan balances and reported credit metrics.
- Whether capital ratios, liquidity reserves and the dividend remain resilient; note that the reported Q1 capital ratios were preliminary and included the optional CECL regulatory-capital transition.
- Developments in the cybersecurity litigation and investigations, insurance reimbursements and total remediation costs, as well as the PPI and other litigation exposures.
- Whether withdrawn guidance is replaced and how low interest rates, cash balances and LIBOR transition affect margins and earnings.