Capital One Financial Corporation (NYSE: COF) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 2, 2024. Results are unaudited. Capital One is a diversified financial services company organized into Credit Card, Consumer Banking and Commercial Banking segments.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / change |
|---|---|---|
| Total net revenue | $9.402 billion | $8.903 billion in Q1 2023; up 6% |
| Net interest income | $7.488 billion; net interest margin 6.69% | $7.186 billion and 6.60% in Q1 2023 |
| Net income | $1.280 billion; diluted EPS $3.13 | $960 million; diluted EPS $2.31 in Q1 2023 |
| Provision for credit losses | $2.683 billion | $2.795 billion in Q1 2023 |
| Non-interest expense | $5.137 billion | $4.945 billion in Q1 2023; up 4% |
| Net charge-offs | $2.616 billion; rate 3.33% | $1.697 billion; rate 2.21% in Q1 2023 |
| Loans held for investment | $315.2 billion | $320.5 billion at December 31, 2023 |
| Total deposits | $351.0 billion | $348.4 billion at December 31, 2023 |
| Total assets / stockholders’ equity | $481.7 billion / $57.8 billion | $478.5 billion / $58.1 billion at December 31, 2023 |
| Debt | $50.4 billion in borrowings, including $17.7 billion securitized debt | $49.9 billion in borrowings at December 31, 2023 |
Average total net revenue margin was 8.40%; return on average assets was 1.08%; and efficiency ratio was 54.64%. Operating cash flow was $3.010 billion, investing cash flow was positive $1.675 billion, and financing cash flow was positive $3.062 billion. Cash, cash equivalents and restricted cash increased $7.747 billion to $51.502 billion.
Liquidity reserves were $127.5 billion, including $51.0 billion of cash and cash equivalents and $78.4 billion of available-for-sale securities. Average first-quarter liquidity coverage ratio was 164%, above the 100% requirement. CET1 capital ratio was 13.1% at quarter-end; management reported that the Company and Bank exceeded applicable capital requirements and were well-capitalized.
Material changes versus comparable periods
- Net income rose 33% year over year, primarily on higher net interest income and non-interest income. Average credit card loan balances and asset yields increased; higher deposit costs partly offset these gains.
- Credit Card net income increased to $961 million from $549 million. Average loans grew 11%, while the segment’s net charge-off rate increased to 5.90% from 4.06%.
- Consumer Banking net income fell to $381 million from $716 million, as lower net interest income and higher credit provision more than offset reduced expenses. Auto loan originations increased 21% year over year.
- Commercial Banking net income increased to $280 million from $54 million, including a $2 million provision benefit versus a $259 million provision in Q1 2023. The benefit reflected an allowance release related to office real estate portfolio exits. The segment’s nonperforming loan rate increased to 1.28% from 0.84% at year-end.
- Overall loans declined $5.3 billion from year-end, mainly from seasonal credit card paydowns. Deposits increased $2.6 billion, driven by consumer banking growth. The allowance for credit losses rose $84 million to $15.4 billion; coverage increased to 4.88%.
Outlook, risks and unusual items
- Discover transaction: Capital One agreed to acquire Discover in an all-stock transaction; each Discover common share is to convert into 1.0192 Capital One shares. Completion requires regulatory and stockholder approvals and other customary conditions. Capital One must resubmit its capital plan because of the proposed acquisition; capital distributions are subject to prior Federal Reserve approval pending review. The merger agreement limits quarterly common dividends to $0.60 per share until closing or termination.
- CFPB credit-card late-fee rule: The final rule would significantly lower the safe-harbor amount for past-due fees and could materially affect revenue. Its stated May 14, 2024 effective date is subject to ongoing litigation. Management says it has implemented or is developing mitigations and expects them to resolve the impact gradually over time; no quantified outlook is provided.
- FDIC special assessment: Capital One recorded $42 million of additional expense in Q1, bringing its accrued assessment to $331 million. The filing identifies approximately $200 million of reasonably possible additional fees beyond the accrual, subject to further developments.
- Credit and portfolio risks: Net charge-offs rose materially year over year, led by domestic credit cards. Delinquency rates declined from year-end, which management attributed primarily to seasonality. Commercial real estate remains an area to monitor: office real estate loans were $2.2 billion, while total commercial real estate nonperforming loans increased during the quarter.
- Legal and partnership matters: Walmart obtained a March 26 ruling that it could terminate its credit-card partnership; the parties later sought a stay while negotiating termination and portfolio transition. For disclosed litigation matters where an estimate was possible, management estimated reasonably possible losses beyond reserves of approximately $200 million; actual losses could exceed that estimate.
- Other unusual items: The Q1 2024 non-GAAP adjusted operating efficiency ratio was 43.45%, excluding the $42 million FDIC special-assessment expense; the GAAP operating efficiency ratio was 43.89%. Available-for-sale securities and hedging-related OCI losses contributed to a $1.266 billion decline in other comprehensive income, leaving comprehensive income of $14 million.
The filing does not provide numerical earnings or revenue guidance. Management notes that net interest income and margin may fluctuate with interest rates and changes in asset and funding mix. Under its modeled scenarios, 12-month net interest income increases in higher-rate scenarios and decreases in lower-rate scenarios; economic value of equity decreases under higher-rate shocks. These are estimates, not forecasts of actual results.
Important facts for investors to verify
- Regulatory and shareholder approval status, expected timing, integration costs and potential benefits of the Discover transaction, and any changes to capital-distribution permissions.
- Litigation developments and the realized revenue effect, timing and effectiveness of mitigations related to the CFPB late-fee rule.
- Subsequent trends in credit-card and auto charge-offs, delinquencies, allowance coverage and commercial real estate nonperforming loans.
- Any revision to the FDIC assessment, including whether additional expense arises beyond the $331 million accrued.
- Walmart partnership termination terms and transition effects, and developments in the savings-account and other disclosed litigation.
- Deposit growth, deposit costs, uninsured deposit levels, liquidity and capital ratios; the filing reports approximately 18% of deposits as uninsured at quarter-end.