Capital One Financial Corporation (NYSE: COF) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 20, 2020. The filing also reports fourth-quarter results. Capital One is a diversified financial services company with Credit Card, Consumer Banking and Commercial Banking segments.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total net revenue | $28.6 billion | $28.1 billion | +2% |
| Net interest income | $23.3 billion | $22.9 billion | +2% |
| Net income | $5.5 billion | $6.0 billion | −8% |
| Diluted EPS | $11.05 | $11.82 | −7% |
| Provision for credit losses | $6.2 billion | $5.9 billion | +6% |
| Net charge-off rate | 2.53% | 2.52% | +1 basis point |
| Net interest margin | 6.83% | 6.87% | −4 basis points |
Revenue growth reflected higher loan yields, loan growth and interchange fees, partly offset by higher funding costs. Earnings fell primarily because of higher operating, technology, infrastructure and marketing expenses, increased credit provisions, and the absence of certain 2018 gains and tax benefits. The efficiency ratio rose to 54.15% from 53.08%; return on average assets was 1.48%, down from 1.66%.
- Fourth quarter: Net income was $1.176 billion and diluted EPS was $2.25, compared with $1.261 billion and $2.48 in Q4 2018. Q4 provision for credit losses was $1.818 billion.
- Cash flows: Operating activities provided $16.6 billion; investing activities used $23.0 billion; financing activities provided $6.6 billion. Cash, cash equivalents and restricted cash ended the year at $13.7 billion. These bank cash-flow figures are not equivalent to an industrial-company free-cash-flow measure.
- Balance sheet and funding: Assets were $390.4 billion, loans held for investment $265.8 billion, deposits $262.7 billion and stockholders’ equity $58.0 billion at year-end. Period-end loans grew 8% and deposits 5%. Borrowings totaled $55.7 billion, including securitized debt and other debt.
- Liquidity and capital: Liquidity reserves were $90.6 billion; average Q4 LCR exceeded the 100% regulatory minimum (the filing does not give a specific ratio in this text). CET1 was 12.2%, up from 11.2%; total capital was 16.1%, and supplementary leverage was 9.9%.
- Credit and segments: Delinquencies of 30 days or more fell to 3.74% from 3.84%, while nonperforming loans rose to $983 million from $813 million. Credit Card earned $3.1 billion, Consumer Banking $1.8 billion, and Commercial Banking $621 million; commercial earnings declined 23%, largely amid energy-portfolio deterioration.
Material changes, outlook and risks
- Capital One became the exclusive U.S. issuer for Walmart’s cobrand and private-label cards and acquired about $8.1 billion of receivables in October 2019. Walmart launch and integration expenses were approximately $211 million for the year. The company also exited several smaller card partnerships.
- Management expected modest improvement in the adjusted operating efficiency ratio in 2020 and a decline to 42% in 2021; 2020 marketing expense was expected to be moderately higher than 2019. It expected auto net charge-offs to rise gradually as the credit cycle progressed.
- CECL took effect January 1, 2020. Management estimated reserves would increase about $2.9 billion and retained earnings decrease about $2.2 billion; the phased-in impact was expected to reduce first-quarter 2020 CET1 by 16 basis points. Management intended to elect the regulatory transition phase-in.
- Cybersecurity incident: Unauthorized access affected approximately 100 million people in the U.S. and 6 million in Canada. The company reported $72 million of response expenses, offset by $34 million of insurance recoveries, and expected total adjusting items at the low end of its prior $100–$150 million estimate. Cyber-related lawsuits and government inquiries continued; the ultimate costs and potential insurance coverage remain uncertain.
- Contingencies: The U.K. PPI reserve was $188 million, with approximately $50 million of reasonably possible additional losses beyond the reserve. For certain litigation matters, management estimated approximately $1.1 billion of reasonably possible losses beyond reserves; actual losses could exceed estimates. A $100 million OCC AML penalty had been paid, and the related consent order was lifted in November 2019.
- Other key exposures include consumer and commercial credit deterioration, commercial energy and geographic concentrations, interest-rate and deposit-cost pressure, LIBOR transition, regulation, cybersecurity and third-party technology risks. The 2019 audit opinion on the financial statements and internal controls was unqualified; management reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Walmart portfolio growth and partnership economics deliver returns sufficient to offset launch, integration and ongoing costs.
- Commercial energy loan performance, criticized and nonperforming exposures, and any further allowance builds.
- CECL’s actual day-one reserve and capital effects versus management’s estimates and transition assumptions.
- Final cyber incident costs, insurance reimbursements, litigation outcomes and regulatory resolutions.
- Execution against the 2020–2021 efficiency targets while technology, infrastructure and marketing spending remain elevated.
- That liquidity, capital and distributions remain adequate under stress, including the effects of funding costs, regulatory changes and credit losses.