Capital One Financial Corporation (COF) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Capital One is a diversified financial services company operating Credit Card, Consumer Banking and Commercial Banking businesses. Comparisons below are primarily with 2020’s corresponding periods; balance-sheet comparisons are with December 31, 2020.
Financial performance and condition
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Total net revenue | $7.37 billion, up 12% | $14.49 billion, up 5% |
| Net income | $3.54 billion; diluted EPS $7.62 | $6.86 billion; diluted EPS $14.65 |
| Net interest income | $5.74 billion, up 5% | $11.57 billion, up 1% |
| Provision for credit losses | $1.16 billion benefit | $1.98 billion benefit |
| Non-interest expense | $3.97 billion, up 5% | $7.71 billion, up 3% |
| Net interest margin | 5.89%, up 11 bps | 5.94%, down 32 bps |
| Net charge-off rate | 0.88%, down 150 bps | 1.04%, down 151 bps |
Revenue growth included higher card purchase volume and interchange income. The sharp earnings recovery primarily reflected credit-loss reserve releases, compared with substantial reserve builds in 2020 at the start of the COVID-19 pandemic. Lower deposit rates also supported net interest income; lower average domestic card balances partly offset that benefit. Q2 return on average assets was 3.34% and the efficiency ratio was 53.78%.
Balance sheet and funding at June 30: Total assets were $423.4 billion; loans held for investment were $249.6 billion; deposits were $306.3 billion; and borrowings were $36.3 billion. The allowance for credit losses was $12.35 billion, or 4.95% of loans, down from $15.56 billion and 6.19% at year-end. Period-end 30+ day delinquencies were 1.89%, versus 2.61% at year-end. Common equity Tier 1 capital was 14.5%, compared with 13.7% at year-end.
Cash flow and liquidity: For the first six months, operating cash flow was $5.69 billion, investing cash flow was negative $7.69 billion and financing cash flow was negative $3.69 billion. Cash and cash equivalents were $34.85 billion, down from $40.51 billion at year-end. Liquidity reserves totaled $137.0 billion, and average Q2 liquidity coverage ratio was 141%, above the 100% requirement.
Material changes and business segments
- Credit Card: Q2 net income was $2.17 billion, versus a $533 million loss. Purchase volume rose 47% to $132.7 billion; lower average balances reduced net interest income, while interchange income increased. Credit-loss provision was a $635 million benefit.
- Consumer Banking: Q2 net income was $1.09 billion, versus a $114 million loss. Auto loan originations increased 56% to $13.0 billion, and period-end consumer banking loans rose 9% from year-end to $74.8 billion.
- Commercial Banking: Q2 net income was $396 million, versus a $118 million loss. Provision was a $219 million benefit. Nonperforming loan rate rose to 1.03% from 0.86% at year-end, reflecting isolated real-estate credit downgrades.
Loans held for investment declined $2.0 billion from year-end, in part because $4.1 billion of loans were transferred to held for sale and customers made higher payments; auto portfolio growth partly offset the decline. Deposits increased modestly, while securitized debt and other debt declined through paydowns, maturities and senior debt redemptions. Marketing expense rose significantly as the company increased spending.
Outlook, risks and notable items
- Management expects the auto net charge-off rate to rise from the unusually low Q2 2021 level. The filing gives no broader quantitative earnings or revenue guidance.
- Outcomes remain sensitive to the uncertain course and economic effects of COVID-19, consumer and business credit performance, interest rates, deposit levels and costs, regulation, litigation, cybersecurity, competition and execution of business plans. Management cautions that actual results may differ materially from forward-looking statements.
- Management estimated reasonably possible litigation losses beyond existing reserves of approximately $250 million as of June 30, 2021; actual losses could exceed that estimate. Matters include interchange litigation, cybersecurity-related class actions and investigations, and taxi-medallion investigations. The company previously paid an $80 million OCC penalty related to the 2019 cybersecurity incident.
- After quarter-end, the board authorized a $0.60-per-share special dividend and increased the quarterly common dividend from $0.40 to $0.60, beginning in Q3 2021. The company repurchased approximately $1.7 billion of common stock in Q2 and $2.2 billion in the first half under a $7.5 billion authorization.
- After quarter-end, Capital One issued Series N preferred stock and announced redemption of Series E preferred stock; the filing estimates the redemption will reduce Q3 net income available to common shareholders by approximately $12 million.
- The company reported that disclosure controls were effective as of June 30, 2021 and that there were no material changes in internal control over financial reporting during Q2.
Most important facts for investors to verify
- Whether reserve releases and unusually low delinquencies and charge-offs persist as customer assistance and pandemic-related conditions normalize.
- Whether card purchase growth translates into sustained loan balances, net interest income and interchange revenue, and how higher marketing costs affect returns.
- Commercial real-estate and industrial credit trends, including the rise in commercial nonperforming loans and the concentration of commercial real estate loans in the Northeast.
- The adequacy of the $12.35 billion credit-loss allowance under changing economic forecasts, and any subsequent revisions to preliminary capital ratios.
- Developments and potential financial exposure in disclosed litigation and regulatory matters, particularly cybersecurity and interchange cases.
- Capital allocation following the end of temporary Federal Reserve distribution restrictions, including execution of the repurchase authorization, increased dividend and preferred-stock transactions.