Capital One Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Capital One is a diversified financial services company operating through Credit Card, Consumer Banking and Commercial Banking segments.
Financial performance and condition
- Revenue and earnings: Total net revenue was $7.1 billion, down 2% from $7.2 billion a year earlier. Net income was $3.325 billion, or $7.03 per diluted share, versus a $1.340 billion net loss, or $3.10 per diluted share, in Q1 2020.
- Primary earnings driver: Provision for credit losses was a benefit of $823 million, compared with a $5.423 billion provision in Q1 2020. The filing attributes the change to a $1.6 billion allowance release, supported by strong credit performance and an improved economic outlook.
- Net interest income and margins: Net interest income fell 3% to $5.822 billion; net interest margin decreased 79 basis points to 5.99%. Lower average domestic card balances and greater interest-bearing deposit balances were partly offset by lower funding costs. Non-interest income increased 5% to $1.291 billion, helped by higher purchase volume and interchange fees.
- Expenses and profitability: Non-interest expense was essentially flat at $3.740 billion. Return on average assets was 3.16%; the efficiency ratio was 52.58%.
- Cash flow: Net cash from operating activities was $1.636 billion, investing activities provided $7.272 billion and financing activities provided $2.595 billion. Cash, cash equivalents and restricted cash rose $11.503 billion to $52.274 billion. These cash-flow totals reflect lending and deposit activity and should be considered in the context of the company’s banking business.
- Balance sheet and funding: Total assets were $425.2 billion. Period-end loans held for investment were $243.1 billion, down $8.5 billion from year-end 2020; deposits were $310.3 billion, up $4.9 billion. Borrowings totaled $38.5 billion, including $12.1 billion of securitized debt and $26.4 billion of other debt.
- Liquidity and capital: Liquidity reserves were $151.2 billion; the average first-quarter liquidity coverage ratio was 139%, above the 100% requirement. The company’s CET1 ratio was 14.6%, up from 13.7% at year-end. The reported 11.3% supplementary leverage ratio included temporary regulatory exclusions that expired after March 31, 2021.
- Credit quality: Net charge-offs were $740 million, with a 1.21% rate versus 2.72% a year earlier. The 30+ day delinquency rate was 1.98%, down from 2.61% at year-end 2020. The allowance for credit losses was $14.017 billion, or 5.77% of loans, down from $15.564 billion and 6.19% at year-end.
Changes versus comparable periods
- Profitability rebounded sharply from the pandemic-related Q1 2020 loss, primarily because the prior-year period included a large credit-loss provision build while Q1 2021 included an allowance release.
- Average loans held for investment fell 7% year over year, chiefly reflecting higher customer payments and government stimulus effects on domestic card balances. Purchase volume nevertheless increased 8% to $108.3 billion.
- Consumer Banking net income was $902 million versus a $52 million loss; Commercial Banking net income was $416 million versus a $411 million loss. Credit Card net income was $2.105 billion versus a $991 million loss, despite lower segment revenue.
- Deposit growth and lower deposit rates reduced funding costs; deposits increased 15% on an average-balance basis year over year. The available-for-sale securities portfolio’s fair value declined $1.3 billion from year-end, primarily due to higher interest rates.
Outlook, risks and unusual items
- Outlook: No specific consolidated earnings or revenue guidance is provided. Management expected Auto net charge-offs to rise as elevated used-car auction prices recede and temporary stimulus benefits diminish. Card balances remained pressured by high customer payments and stimulus, while Auto originations and loan growth improved.
- COVID-19: Management cited continuing uncertainty around the pandemic and its effects on customers, the economy, credit-loss estimates and business operations. Active enrollments in the main Auto and Domestic Card payment-accommodation programs were low at quarter-end.
- Capital returns: The board authorized up to $7.5 billion of common-stock repurchases in January; approximately $490 million was repurchased in Q1. Temporary Federal Reserve distribution restrictions applied through Q2 2021. The company declared and paid $0.40 per common share in Q1.
- Legal matters: Management estimated reasonably possible future litigation losses beyond recorded reserves at approximately $250 million as of March 31, 2021, while noting actual losses could exceed that estimate. Matters include interchange litigation and proceedings and inquiries related to the 2019 cybersecurity incident. The company had paid an $80 million OCC penalty related to that incident.
- Other notable items: The Other category included a loss on the company’s Snowflake investment, reducing its cumulative gain to $460 million. On May 4, 2021, after quarter-end, Capital One issued Series L preferred stock with approximately $652.9 million in net proceeds.
- Principal risks: Credit deterioration, economic and pandemic uncertainty, interest-rate and deposit-cost changes, regulatory requirements, cybersecurity and operational resilience, litigation, and the transition away from LIBOR. Moody’s and Fitch had negative outlooks on ratings; S&P’s outlook was stable.
Important facts for investors to verify
- How much of reported earnings reflects the allowance release, and how sensitive remaining reserves are to changes in economic forecasts.
- Whether improving delinquency and charge-off trends persist as stimulus effects and customer payment patterns change, particularly in Auto and Card.
- Whether loan balances and net interest income recover as card spending rises, and how interest rates affect asset yields, funding costs and securities values.
- The company’s capital and repurchase capacity after the temporary distribution restrictions and supplementary leverage ratio exclusions expired, including results of the 2021 stress test.
- Developments in the disclosed litigation and cybersecurity matters, and whether ultimate losses exceed current reserves or the estimated $250 million reasonably possible amount.