- Capital One has increased provision for credit losses by 219% which has resulted in net losses each quarter.
- The bank has very solid financial strength shown by good capital ratios and liquidity coverage.
- The stock is trading below book and tangible book values.
Introduction
In April, I wrote Capitalize On Capital One Financial, which showed that the bank has very solid past profitability and strong financial strength. In the article I stated that because Capital One (COF) was trading almost 50% off of 2019 book value of $127.05 I was starting a position. Two full quarters later, I am checking up on the business to see just where it stands. The past two quarters have been tough but the concern of forbearance to me is not a huge long-term concern. Therefore, with Capital One trading below tangible book value I will keep adding to my position.
The Year So Far
Q1 for Capital One starts in January and ends in March, therefore it only received some exposure from the pandemic. Net revenue in Q1 was $7.249 Billion, up 2% compared to Q1 2019. But net income was not pretty with a loss of $1.34 Billion which is down a whopping 194.9% from Q1 2019 net income of $1.412 Billion. What was the reason for this decline? Well, due to COVID-19 Capital One increased the provision for credit losses by 220% from prior year to a total of $5.423 Billion. Just for comparison sake in 2019, Q1 provisions were just $1.693 Billion. This is what is expected though from such an uncertain event like a pandemic, as banks try to estimate the expected losses. The net interest margin for the quarter one stayed rather flat at 6.78%, only decreasing by 8 basis points from Q1 2019.
Q2 was much worse as it is from April to June and consisted of much of the lockdown period and layoffs. Net revenue was down -8% in Q2 coming in at $6.556 Billion from $7.124 Billion in Q2 2019. Provision for credit losses was a bit lower than last quarter at $4.246 Billion but still increased 216% from prior year. This resulted in another loss of $0.918 Billion. The net interest margin was 5.78%, falling 1.02% due to lower rates in general and a shift in asset mix from less credit card to more consumer & commercial banking.
Overall, the six months when put together were bad but could have been worse. Net revenue was $13.805 Billion, down 3% from $14.207 Billion. Again, as expected the provision for losses was the main negative factor increasing 219% for the six months and totaling $9.669 Billion. The provisions created a net loss of $2.258 Billion.
Charge-Off & Forbearance
| Charge Off Rate | Delinquency Rate | |
| March | 5.06% | 3.69% |
| April | 4.95% | 3.58% |
| May | 4.49% | 3.15% |
| June | 4.15% | 2.74% |
| July | 3.82% | 2.44% |
Source: Seeking Alpha News
The main topic of discussion within the investment community regarding Capital One has been charge-off rates and the forbearance banks have extended to customers. Above are the reported monthly charge-off and delinquency rates. What can be seen is that since March these rates have been decreasing. In fact, for Q1 the net charge of rate and 30+ day delinquency rate was 2.72% and 3.16%, while in Q2 it was 2.38% and 2.30%. This looks great at first sight, but everyone knows that banks have offered forbearance on many accounts that would skew or delay bad metrics.
