Business context and reporting period
Capital One Financial Corporation is a diversified financial services company operating in Credit Card, Consumer Banking and Commercial Banking. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are primarily with the corresponding 2020 periods. Balance-sheet comparisons are with December 31, 2020.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total net revenue | $7.830bn | $7.381bn | $22.317bn | $21.186bn |
| Net interest income | $6.156bn | $5.555bn | $17.721bn | $17.040bn |
| Provision (benefit) for credit losses | $(342)m | $331m | $(2.325)bn | $10.000bn |
| Non-interest expense | $4.186bn | $3.548bn | $11.892bn | $11.047bn |
| Net income | $3.104bn | $2.406bn | $9.965bn | $148m |
| Diluted EPS | $6.78 | $5.06 | $21.44 | $(0.20) |
Q3 net income available to common stockholders was $2.987bn. The nine-month figure was $9.669bn.
- Margins and returns: Q3 net interest margin was 6.35% (up 67 basis points year over year); total net revenue margin was 8.08%. Return on average assets was 2.92%; return on average common equity was 20.52%.
- Credit: Q3 net charge-offs were $426m and the annualized net charge-off rate was 0.67%, versus 1.72% a year earlier. At September 30, the 30+ day delinquency rate was 2.13%, down from 2.61% at year-end 2020. The allowance for credit losses was $11.573bn, or 4.43% of loans, down from $15.564bn and 6.19% at year-end.
- Balance sheet: Total assets were $425.377bn; loans held for investment were $261.390bn; deposits were $305.938bn; and total stockholders’ equity was $63.544bn. Total short- and long-term debt was $37.501bn, down from $40.539bn at year-end.
- Liquidity and capital: Liquidity reserves were $124.4bn, compared with $144.0bn at year-end; average Q3 liquidity coverage ratio was 143%, above the 100% requirement. CET1 capital ratio was 13.8%, Tier 1 capital 15.7%, total capital 18.2%, and Tier 1 leverage 12.2%.
- Cash flows, first nine months: Net cash from operating activities was $7.648bn, investing activities used $15.046bn, and financing activities used $6.515bn. Cash, cash equivalents and restricted cash declined $13.913bn to $26.858bn.
Material changes versus the prior comparable period
- Q3 revenue rose 6% and net income rose 29%; for the first nine months, revenue rose 5% and net income increased substantially from the pandemic-affected 2020 level.
- The largest earnings factor was the shift from credit-loss provision expense in 2020 to provision benefits in 2021, reflecting allowance releases tied to strong credit performance and an improved economic outlook. Nine-month net charge-offs fell 61% to $1.707bn.
- Q3 net interest income rose 11%, supported by higher card margins and average card and auto loan balances. Lower deposit costs also supported nine-month net interest income.
- Q3 non-interest income declined 8%, chiefly because the prior-year period included a gain on the Snowflake investment; higher purchase volume and interchange income partly offset the decline. Nine-month non-interest income rose 11%, mainly on higher interchange fees.
- Marketing expense rose to $751m in Q3 from $283m, contributing to an 18% increase in total non-interest expense. Management also cited higher salaries and technology investment.
- Loans held for investment grew 4% from year-end, led by auto and commercial lending; card balances were lower, including following a $2.6bn international card portfolio transfer to held for sale.
Outlook, commentary, risks and unusual items
- Management expected Q4 2021 marketing expense to exceed Q3 levels, consistent with seasonality, and said technology investment was likely to pressure the operating efficiency ratio. The filing gives no specific full-year earnings or revenue guidance.
- The company repurchased approximately $2.7bn of common stock in Q3 and $4.9bn in the first nine months under a $7.5bn authorization. It paid a $0.60-per-share special dividend and increased the quarterly common dividend to $0.60 per share in Q3.
- Capital One issued Series L, M and N preferred stock for net proceeds of approximately $2.053bn in total and redeemed $1.0bn of Series E preferred stock. It announced planned December 2021 redemptions of Series G and H preferred stock for an aggregate $1.1bn.
- Available-for-sale securities declined $2.3bn in fair value from year-end, primarily as interest rates increased. Nine-month other comprehensive income was a loss of $2.134bn, largely reflecting unrealized securities and hedging losses.
- COVID-19 effects remain uncertain. Management identifies economic conditions, credit losses and reserve estimates, interest rates, deposit trends, cyber and operational risk, regulation, competition, and execution as material risks. LIBOR transition work is ongoing.
- Legal matters include interchange-fee litigation, cybersecurity-incident proceedings and government inquiries, taxi-medallion investigations, and U.K. PPI claims. For specified matters where an estimate was possible, management estimated reasonably possible future losses beyond recorded reserves of approximately $200m; actual losses could exceed that estimate.
Important facts for investors to verify
- Whether the unusually large allowance releases and low delinquency and charge-off rates persist, and how reserve levels respond to changing economic conditions.
- Whether loan growth, card purchase volume and interchange income can continue to offset higher marketing and technology costs.
- How the $124.4bn liquidity-reserve level, deposit mix and funding costs evolve; confirm regulatory liquidity and capital ratios as filed in subsequent periods.
- The execution and capital impact of share repurchases, common dividends, and preferred-stock redemptions and issuances.
- Developments in the disclosed litigation and investigations, including whether losses exceed current reserves and the stated estimated range.
- Whether management’s stated Q4 marketing outlook and technology-related efficiency pressure materialized.