CHICAGO--(BUSINESS WIRE)--Capital One Financial's (COF) first quarter 2014 (1Q'14) earnings of $1.14 billion were higher relative to both the sequential and year-ago quarters, thanks in part to a $208 million reserve release in the quarter, says Fitch Ratings. These results equated to a good 1.53% return on average assets (ROA) in 1Q'14, which compares well to other large regional banks.
Not including the reserve release, COF's ROA would have been in the 1.26% range, which Fitch notes is still a good result. Additionally, Fitch notes that this adjusted ROA is likely a good run-rate for COF for the balance of the year, as Fitch believes reserve releases should begin to abate.
Total revenue declined from both the sequential and year-ago quarters given lower net interest income (NII) due in part to modestly lower loan balances relative to the sequential quarter, and lower non-interest income despite higher purchase volumes. Additionally, the company's net interest margin (NIM) declined to 6.62% in 1Q'14 from 6.73% in the sequential quarter and 6.71% in the year-ago quarter.
Expenses declined due in part to lower marketing expenses relative to the sequential quarter and relatively flat marketing expenses relative to the year ago quarter. The bigger impact to the expense line item, however, was the adoption of a new accounting standard for the company's low income housing tax credits in its commercial business. This moved these credits out of the expense line item and into the income tax line item. Other than the different accounting classification this didn't have a significant impact on bottom line results.
As previously noted, the overall loan portfolio was down relative to the sequential quarter. Domestic credit cards, COF's largest lending category, declined as did loans in its consumer banking segment which includes auto loans and legacy mortgages. In this segment continued growth in auto was largely offset by the expected run-off of the legacy mortgage loans. The commercial banking unit, COF's smallest, which includes traditional C&I lending as well as some Commercial Real Estate (CRE) lending had some modest growth, but given its smaller size, was unable to offset the decline in lower card balances.
Credit quality for COF--as well as the rest of the industry--continues to be very strong, with the overall net charge-off (NCO) rate declining to 1.92% in 1Q'14. Fitch continues to believe that credit quality for COF and the banking industry continues to be at or near a cyclical trough, and Fitch would expect some deterioration in credit metrics over a medium-term time horizon.
COF's Tier 1 common equity (CET1) ratio under the Basel III standardized approach was 13% in 1Q'14, and under the advanced approach was above its target of 8%. Fitch continues to view COF's capital ratios as adequate, but below the average of some similarly rated entities. However, in Fitch's view, this continues to be offset by COF's superior capital generation abilities relative to some peers.
Additional information is available at www.fitchratings.com.
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