Business context and reporting period
Capital One Financial Corporation is a diversified financial services company focused on credit cards, consumer banking and commercial banking. This unaudited Form 10-Q covers the quarter ended March 31, 2023; comparisons are generally with the first quarter of 2022, or with December 31, 2022 for period-end balance-sheet and credit measures.
Financial and operating highlights
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Total net revenue | $8.903 billion | Up 9% year over year |
| Net interest income | $7.186 billion | Up 12%; higher average card loan balances were a primary driver |
| Net interest margin | 6.60% | Up 11 basis points year over year |
| Provision for credit losses | $2.795 billion | Up from $677 million; driven largely by card allowance building and credit normalization |
| Non-interest income | $1.717 billion | Down 3% |
| Non-interest expense | $4.945 billion | Up 9%, mainly higher salaries and associate benefits |
| Net income / diluted EPS | $960 million / $2.31 | Down 60% / 59%, respectively |
| Net charge-off rate | 2.21% | Up 110 basis points year over year |
| Efficiency ratio | 55.54% | Versus 55.68% a year earlier |
Net income available to common stockholders was $887 million. The effective tax rate was 17.5%, compared with 18.4% in Q1 2022. Purchase volume rose 6% to $141.7 billion. Average loans held for investment increased 12% year over year to $307.8 billion, chiefly reflecting credit card growth.
Business segments
- Credit Card: Net income was $549 million, down 63%. Revenue increased 14% to $6.02 billion, but provision rose to $2.261 billion. The net charge-off rate increased to 4.06% from 2.18%.
- Consumer Banking: Net income increased 10% to $716 million. Revenue rose 12% to $2.495 billion; provision increased to $275 million. Auto loan originations fell 47% year over year to $6.211 billion.
- Commercial Banking: Net income fell to $54 million from $296 million. Provision was $259 million, compared with $8 million, including an allowance build in the office real estate portfolio; non-interest income also declined.
Balance sheet, liquidity, capital and cash flow
- At March 31, total assets were $471.7 billion, up from $455.2 billion at year-end; total loans held for investment were $308.8 billion, down from $312.3 billion.
- Deposits rose to $349.8 billion from $333.0 billion, primarily reflecting the national banking strategy and time-deposit offers. Borrowings were $48.8 billion, broadly unchanged from year-end.
- Cash and cash equivalents were $46.5 billion versus $30.9 billion at year-end. Liquidity reserves totaled $126.7 billion, up $20.1 billion. Average first-quarter LCR was 148%, above the 100% requirement; the company and bank exceeded the NSFR requirement, but the filing gives no specific NSFR value.
- Estimated uninsured deposits were $76.4 billion, approximately 22% of deposits, down from $80.7 billion and 24% at year-end. The filing notes estimates are based on regulatory reporting methodologies.
- Allowance for credit losses was $14.318 billion, up $1.078 billion from year-end; coverage was 4.64% of loans versus 4.24%. CET1 was 12.5%, unchanged from year-end; it would have been 12.2% excluding the remaining CECL transition benefit.
- Cash flow from operating activities was $2.992 billion versus an outflow of $79 million in Q1 2022; investing cash flow was an outflow of $2.994 billion versus an inflow of $1.773 billion; financing cash flow was an inflow of $15.719 billion versus $3.337 billion.
- Available-for-sale securities had a fair value of $81.9 billion. Gross unrealized losses were $9.082 billion, primarily on agency mortgage-backed securities; AOCI improved to a loss of $8.540 billion from $9.916 billion at year-end. These unrealized amounts are not presented as realized losses.
Material changes, outlook, risks and unusual items
The sharp year-over-year earnings decline primarily reflects credit costs: the company recorded a substantial allowance build in credit cards, amid continued credit normalization and assumed economic worsening, versus allowance releases across segments in Q1 2022. Net charge-offs rose to $1.697 billion from $767 million. Overall 30-plus-day delinquencies were 3.09% at quarter-end, down from 3.21% at year-end, while the card delinquency rate increased to 3.69% from 3.46%. Management attributed the overall decline largely to seasonal auto delinquency improvements.
No specific earnings, revenue or credit-loss guidance is provided in the supplied filing text. Management describes results as subject to economic conditions, interest rates, credit trends, funding costs, deposit activity, competition, regulation, operational and cyber risks, and model and estimation uncertainty. The company is structurally asset-sensitive: its modeled 12-month net interest income impact was +1.5% under a parallel +200-basis-point shock and -3.4% under a -200-basis-point shock. These are scenario estimates, not forecasts; modeled economic value of equity declined 4.8% in the +200-basis-point scenario.
Commercial real estate merits attention: office real estate funded exposure was $3.6 billion, or 4% of commercial loans, and management cited an office portfolio allowance build. The filing also reports $425.0 billion in unfunded lending commitments, largely credit card lines and other customer commitments; contractual amounts do not necessarily represent expected funding needs.
Potential litigation losses reasonably possible beyond existing reserves were estimated at approximately $200 million for matters where an estimate was possible; the company cautions actual losses could exceed reserves and that estimates are not possible for some matters. Walmart filed suit after quarter-end seeking to terminate its card partnership agreement; Capital One disputes Walmart’s claimed termination right and filed counterclaims. The filing states that the ASU 2022-02 adoption had no material financial-statement impact. Capital One submitted its 2023 capital plan on April 5, with supervisory stress-test results expected by June 30. No material changes to the risk factors in its 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether card delinquencies, charge-offs and required allowance builds continue to rise, and how those trends affect earnings.
- Deposit growth, deposit pricing and retention, including uninsured-deposit levels and the cost and mix of time deposits.
- Office and broader commercial real estate credit performance, criticized exposures, and the adequacy of related reserves.
- Liquidity and regulatory capital trends, including CET1 on a fully phased-in CECL basis and results of the 2023 supervisory stress test.
- Developments and potential financial effects of the Walmart partnership litigation and other legal proceedings.
- That segment results use management allocations and are not directly comparable to GAAP results from other companies; non-GAAP metrics also require reconciliation and may not be comparable.