Capital One Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative income-statement figures are for Q1 2021. Capital One is a diversified financial services company operating in Credit Card, Consumer Banking and Commercial Banking.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Total net revenue | $8.17 billion | Up 15% from $7.11 billion |
| Net interest income | $6.40 billion | Up 10%; net interest margin 6.49%, up 50 bps |
| Non-interest income | $1.78 billion | Up 38%, including higher interchange and a gain on sale of partnership card portfolios |
| Provision for credit losses | $677 million expense | Compared with an $823 million benefit in Q1 2021 |
| Non-interest expense | $4.55 billion | Up 22%; marketing expense rose 83% to $918 million |
| Net income | $2.40 billion; diluted EPS $5.62 | Down 28% and 20%, respectively |
| Loans held for investment | $280.5 billion | Up 1% from December 31, 2021; average loans up 13% year over year |
| Deposits / borrowings | $313.4 billion / $45.4 billion | Deposits up 1%; borrowings up 5% from year-end |
| Allowance for credit losses | $11.3 billion; 4.03% of loans | Down from $11.4 billion and 4.12% at year-end |
| Capital and liquidity | CET1 12.7%; liquidity reserves $110.5 billion | CET1 was 13.1% at year-end; Q1 average LCR was 140%, above the 100% requirement |
Cash flow: Operating activities used $79 million, investing activities provided $1.77 billion and financing activities provided $3.34 billion. Cash, cash equivalents and restricted cash increased by $5.03 billion during the quarter. Cash-flow figures should be considered alongside the balance sheet and the nature of bank funding flows.
Material changes and segment performance
- Revenue growth reflected higher average loan balances, credit-card margins and purchase volume; card purchase volume increased 23% year over year.
- Net income fell primarily because Q1 2021 included a substantial allowance release. Q1 2022 credit-loss provision was $677 million versus a $823 million benefit a year earlier. Higher marketing, compensation and technology spending also weighed on earnings.
- Credit Card net income was $1.50 billion, down 29%; revenue rose 20%, but provision and non-interest expense increased. Its net charge-off rate improved to 2.18% from 2.52% year over year; its 30+ day delinquency rate was 2.39%, up from 2.29% at year-end.
- Consumer Banking net income was $650 million, down 28%. Auto-loan growth supported revenue, while credit-loss provision and expenses increased. Its 30+ day delinquency rate declined to 4.13% from 4.66% at year-end, partly due to seasonality.
- Commercial Banking net income was $296 million, down 29%, despite 16% revenue growth; the prior-year period included a larger credit-loss allowance release.
- Available-for-sale securities fair value fell $6.2 billion from year-end, primarily due to rising interest rates and net paydowns. Q1 other comprehensive loss was $4.47 billion, mainly from securities and hedging-related unrealized losses. Stockholders’ equity declined $4.7 billion, with repurchases and lower accumulated other comprehensive income among the drivers.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management describes continued investment in marketing, technology, infrastructure and growth, and notes that future results depend on economic, credit and interest-rate conditions.
- In January, the Board authorized up to $5 billion in repurchases; approximately $2.4 billion was repurchased in Q1. In April, it authorized a further $5 billion beginning in Q3 2022. Future repurchases remain subject to regulatory approval, market conditions and capital needs.
- Credit conditions showed mixed signals: overall net charge-offs and total delinquencies improved year over year, while card delinquencies increased from year-end and management noted gradual credit normalization. The allowance was broadly flat, while loans grew.
- Liquidity reserves decreased $5.7 billion from year-end, although the company reported a 140% average quarterly LCR and compliance with the NSFR requirement. Rising rates were associated with securities valuation declines; modeled net interest income sensitivity was +1.3% under a +200 bps shock, while economic value of equity sensitivity was -5.1%.
- Reported TDR balances rose to $1.87 billion from $1.64 billion at year-end, partly because COVID-era TDR relief expired January 1, 2022. This reflects a change in classification treatment as well as borrower modifications.
- Management estimated approximately $200 million of reasonably possible litigation losses beyond existing reserves for matters where an estimate was possible; actual losses could exceed that estimate. The U.S. consumer class-action settlement concerning the 2019 cybersecurity incident was within existing reserves and remained subject to court approval. Regulatory inquiries and other legal proceedings continue.
- Other risks highlighted include economic deterioration and credit losses, interest-rate movements, deposit trends and costs, cybersecurity and operational disruptions, regulation, litigation, and the transition away from LIBOR. Capital One reported $15.98 billion of LIBOR commitments maturing after June 30, 2023 without fallback language.
Investor verification priorities
- Confirm the extent to which the Q1 earnings decline reflects the prior-year allowance release versus current credit trends and ongoing expense growth.
- Track card delinquency normalization, auto-loan performance and the adequacy of the $11.3 billion allowance as loan balances grow.
- Review the valuation and capital implications of investment-security losses, including the effect of interest rates and AOCI.
- Assess the pace and funding of authorized share repurchases against CET1 capital, liquidity and regulatory constraints.
- Check subsequent developments in the cybersecurity settlement, other litigation exposures and remaining LIBOR contracts without fallback language.