Capital One second quarter earnings of $830 million were significantly impacted by a $147 million restructuring charge, earnings were further offset by a $41 million build of litigation reserves relative to the company’s U.K. Payment Protection Insurance reserve.
Fitch Ratings says for the industry, PPI insurance was supposed to cover a consumer’s debt payments if they couldn’t have employment, but in many cases these policies were alleged to have been mis-sold and are now creating a liability for the sellers. The addition to the U.K. PPI reserve for COF is a function of more claims staying higher than the company had previously anticipated.
All in, these results equated to a 1.11% return on average assets (ROAA) in 2Q15, which is down from a 1.47% ROAA in the sequential quarter and a 1.64% ROAA in the year-ago quarter.
The significant restructuring charge was due to efficiency initiatives consistent with COF’s focus on becoming a more digitally driven enterprise. This includes reducing headcount in certain areas of the business. Over time Fitch expects this strategy to contribute to making COF’s business model more scalable.
COF’s net revenue was flat relative to the sequential quarter but up 4% relative to the year-ago quarter. The year-over-year growth was due to higher net interest income (NII). Lower NII relative to the sequential quarter was offset by higher non-interest income, all driven by higher net interchange fees.
It is noteworthy that COF’s purchase volume was up strongly, climbing 20% relative to the sequential quarter and 18% relative to the year-ago quarter on General Purpose Credit Cards. At the same time, the company’s growth in domestic credit card loans was in Fitch’s view good, growing 7% relative to the sequential quarter and 10% relative to the year-ago quarter.
Since purchase volume was still noticeably higher than loan growth, Fitch believes COF’s strategy of growing more transaction oriented customers rather than growing customers with revolving balances is gaining traction.
Given some of the good loan growth noted above overall provision for credit losses grew substantially from both the sequential and year-ago quarters. Provision for credit losses was up 21% relative to the sequential quarter and 60% relative to the year ago quarter.
As credit quality for COF (and the rest of the industry) remains good, Fitch believes this increase in provision was largely due to the higher loan balances noted previously as well as continued seasoning of the loan portfolios.
COF’s liquidity position is good and continues to evolve. While deposit growth has begun to moderate, total deposits in 2Q15 still increased by 1% relative to the sequential quarter and 1% relative to the year-ago quarter.
The company’s loan-to-deposit ratio ticked up to 98.7%, which is satisfactory, but higher than some peer institutions. As COF continues to gather deposits, Fitch would expect this ratio to modestly improve (decline) further over time.
Additionally, Fitch believes the company to be in early compliance with the Liquidity Coverage Ratio (LCR) as well.
COF’s transitionally phased-in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach was 12.1%, and under the advanced approaches remained above 8%. While COF’s capital ratios have historically been below those of peers, the company’s stronger than peer capital generation helps offset the lower ratios.
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