CHICAGO--(BUSINESS WIRE)--Capital One Financial Corporation's (COF) third quarter 2016 (3Q16) earnings were good and showed evidence of continued growth in the company's domestic credit card business and auto loan business, according to Fitch Ratings.
COF's overall return on average assets (ROAA) was 1.18% in 3Q16, up from 1.13% in the sequential quarter, but down 1.43% in the year-ago quarter. The year-over-year decline is primarily due to higher provision expense related to continued growth of the credit card portfolio as well as some problem assets in the company's energy portfolio and taxi medallion portfolio as well as $63 million of costs related to a build in the U.K. Payment Protection Insurance customer refund reserve.
The company's return on average equity (ROE) was 8.59% in 3Q16 up from 7.64% in the sequential quarter, but down from 9.54% in the year-ago quarter for the same reasons noted above. Overall revenue growth, while improved, remains challenging amid strong competition for card, auto, and commercial loans.
COF's balance sheet has continued to expand, growing 1.7% from the sequential quarter and 10% from the year-ago quarter. The year-over-year growth is due to both the GE Healthcare acquisition which closed at the end of 2015 as well as the previously noted growth in the company's large domestic credit card portfolio, which expanded 3% relative to the sequential quarter and 11% relative to the year-ago quarter.
Fitch believes this growth in the card portfolio is due to COF's continued efforts in marketing both its QuickSilver and Venture cards, both of which have comparatively good rewards programs. The cost of these rewards programs have partially offset some of the benefits to earnings from the growth noted above.
COF's deposit portfolio has grown more modestly, expanding 2% from the sequential quarter and 6% from the year-ago quarter to $226 million as of 3Q16. Given that loans grew faster than deposits the company's loan-to-deposit ratio remained elevated at approximately 106% as of 3Q16. COF primarily used securitizations and modest increases in wholesale borrowing to fund the loan growth.
Given the growth in the loan portfolio, particularly as it relates to comparatively higher yielding credit card receivables, the company's net interest income grew 4% from the sequential quarter and 11% from the year-ago quarter. Similarly the company's net interest margin (NIM) ticked up to a strong 6.79% in 3Q16, up from 6.73% in both the sequential and year-ago periods.
While COF's purchase volume increased 12% year-over-year, total non-interest income only grew 2% from the sequential quarter and 4% from the year-ago quarter, as Fitch believes COF is continuing to use more of its interchange revenue to fund its good rewards programs noted above.
Total non-interest expenses for COF grew 2% from the sequential quarter and 6% from the year-ago quarter as the company continues to manage expenses carefully within the context of its efforts to develop digital operating platforms and customer interfaces. Relative to both the sequential and year-ago quarters, COF did deliver positive operating leverage and the company's efficiency ratio ticked down to 52.02% in 3Q16.
As noted provision expense increased significantly increased relative to the year-ago quarter due to the acquisition of the GE Healthcare portfolio, growth in credit card and auto loan receivables, and some year-over-year deterioration the energy and taxi medallion portfolios. Relative to the sequential quarter provision was flat as provision related to growth in the credit card and auto loan portfolios was offset by some moderating of the energy loan portfolio.
COF's overall credit quality remains good, with the company's net charge-off (NCO) ratio ticking up modestly to 2.10% in 3Q16 which relative to the last 10 years is still low, though Fitch would note that COF's 30 day+ delinquency ratio is up nine basis points from the prior year period, still solid compared to historical averages. Additionally, this quarter's NCO ratio compares to 2.01% in the sequential quarter and 1.69% in the year-ago quarter.
The up-tick was due to continued seasoning and growth in the domestic credit card and auto loan portfolios. Fitch continues to believe credit quality in these portfolios is around cyclical troughs, and would expect further reversion in NCO ratios over a medium-term time horizon.
As noted, in the commercial portfolio both the energy and taxi medallion portfolios remain problematic. Given the rise in energy prices over the last several months, there has been some moderating of the deteriorating trends in the energy portfolio. Total energy loans are down to $5.4 billion, or 3.98% of the total commercial portfolio, and 1.11% of the total loan portfolio. Given the lower loan balances, the allowance was down sequentially by $22 million, but the energy reserve coverage remains good at 9.18% of loans held for investment.
COF's taxi medallion portfolio continues to see credit deterioration amid the proliferation of ride sharing services such as Uber and Lyft. However, the exposure remains modest at 1.16% of commercial loans and 0.32% of total loans. The allowance for this portfolio is $111mn as of 3Q16, representing reserve coverage of 14.32% of loans held for investment, but only 1.7% of the total allowance.
COF's Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach as of the end of 3Q16 was 10.6% relative to 10.9% at the end of 2Q16. The decline was attributable to some share repurchases during the quarter as well as the balance sheet growth noted above. Similar to last quarter, COF noted that standardized ratio will be the long-term capital constraint for the company.
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