Capital One Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are to the corresponding 2019 periods unless otherwise noted. Capital One is a diversified financial services company operating Credit Card, Consumer Banking and Commercial Banking businesses.
Key financial results
| Metric | Q3 2020 | Nine months 2020 | Comparison |
|---|---|---|---|
| Total net revenue | $7.4 billion | $21.2 billion | Up 6% in Q3; essentially flat for nine months |
| Net interest income | $5.6 billion | $17.0 billion | Down 3% in Q3 and 1% for nine months |
| Provision for credit losses | $331 million | $10.0 billion | Down 76% in Q3; up 126% for nine months |
| Net income | $2.4 billion | $148 million | Versus $1.3 billion and $4.4 billion, respectively, in 2019 |
| Net income available to common stockholders | $2.3 billion | $(91) million | Nine-month diluted EPS was $(0.20), versus $8.79 |
| Diluted EPS | $5.06 | $(0.20) | Versus $2.69 and $8.79, respectively |
| Net interest margin | 5.68% | 6.06% | Down 105 and 74 basis points, respectively |
| Net charge-off rate | 1.72% | 2.28% | Down 66 and 22 basis points, respectively |
Balance sheet, cash flow and capital
- At September 30, total assets were $421.9 billion, loans held for investment were $248.2 billion, and deposits were $305.7 billion. Loans were down $17.6 billion and deposits up $43.0 billion from year-end 2019, reflecting lower card balances and stronger savings and stimulus-related deposit growth.
- Cash and cash equivalents were $44.1 billion, compared with $13.4 billion at December 31, 2019. Liquidity reserves totaled $148.4 billion, up from $90.6 billion; the average Q3 liquidity coverage ratio was 147%, above the 100% requirement.
- For the first nine months, operating cash flow was $12.1 billion, investing cash outflow was $8.9 billion and financing cash inflow was $28.1 billion, including a $42.8 billion increase in deposits.
- Total debt was $42.8 billion, down from $55.7 billion at year-end 2019. Total stockholders’ equity was $58.4 billion.
- Common Equity Tier 1 capital was 13.0%, up from 12.2% at year-end. The allowance for credit losses was $16.1 billion, or 6.50% of loans, versus $7.2 billion and 2.71% at year-end.
- Common dividends were reduced to $0.10 per share for Q3 from $0.40 a year earlier. Share repurchases were suspended in March and remained restricted by the Federal Reserve.
Material changes and business performance
- Q3 net income benefited from a $470 million gain on Capital One’s Snowflake equity investment and lower credit-loss provision, including a $327 million allowance release when a $2.1 billion card partnership portfolio was moved to held for sale.
- Nine-month results were sharply lower primarily because of $5.6 billion in allowance builds during the first half, reflecting expected economic deterioration and uncertainty from COVID-19, along with lower Domestic Card yields and balances. CECL adoption added $2.8 billion to the allowance at adoption and reduced retained earnings by $2.2 billion.
- Credit Card reported Q3 net income of $1.4 billion but a nine-month net loss of $110 million. Consumer Banking earned $796 million in Q3 and $630 million for nine months. Commercial Banking earned $309 million in Q3 but recorded a nine-month loss of $220 million, reflecting credit provisions and energy-portfolio deterioration.
- Purchase volume was $107.1 billion in Q3, down 1%. Period-end card loans fell 19% from year-end; auto and commercial lending grew. Delinquencies declined, but payment extensions and government stimulus affected reported consumer credit performance.
- Non-interest expense declined 8% in Q3 and 2% for nine months, mainly from lower marketing. Nine-month marketing expense fell 33%.
Outlook, risks and unusual items
- Management expected a significant sequential increase in total-company marketing expense in Q4 2020, due to normal seasonality and a full quarter of higher Domestic Card marketing. The filing provides no specific earnings or revenue guidance.
- COVID-19 remains a major uncertainty. Customer hardship programs included card payment deferrals and auto extensions; 16.1% of auto accounts had received an extension at some point through September 30. These programs and stimulus may affect delinquency and loss trends as assistance ends.
- The $16.1 billion credit allowance depends on economic forecasts and significant management estimates; actual losses may differ materially. Commercial risk indicators included higher nonperforming loan rates and energy-related charge-offs.
- Management estimated reasonably possible litigation losses beyond recorded reserves of approximately $1.0 billion, while noting actual losses could exceed that estimate. Cybersecurity-related consumer and securities litigation and regulatory inquiries continued.
- In August, Capital One entered into cybersecurity-related consent orders with the Federal Reserve and OCC and paid an $80 million OCC penalty. Q3 incremental incident expenses were $13 million, offset by $7 million of insurance recoveries; cumulative expenses were $127 million, offset by $67 million. Management expected 2020 costs at the high end of its previously stated $100 million–$150 million range.
- Management said the annual goodwill test indicated reporting-unit fair values remained above carrying values at September 30, but continued monitoring COVID-19-related impairment risks. Credit ratings had negative outlooks as of October 28, 2020.
- The filing reported effective disclosure controls as of September 30, 2020 and no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether the large credit-loss allowance adequately reflects the economic outlook, and how losses and delinquencies evolve when customer assistance and stimulus effects subside.
- How much Q3 earnings depended on the Snowflake gain, the card-loan transfer release and other nonrecurring or market-sensitive items.
- The performance and risk outlook for Commercial Banking, especially energy exposures and pandemic-affected industries.
- Actual cybersecurity remediation costs, insurance recoveries, litigation outcomes and any losses beyond the approximately $1.0 billion reasonably possible estimate.
- Future capital distributions and dividend policy, given Federal Reserve restrictions and the resubmitted capital plan.
- Whether the expected Q4 marketing increase supports card growth and revenue without weakening future profitability.