Capital One’s second-quarter provision for credit losses was $1.7 billion, which included the establishment of a $1.2 billion allowance for loan losses on the acquired HSBC loans. The provision for credit losses increased from $343 million in the first quarter, and a provision for loan and lease losses of $343 million in the second quarter of 2011.
These items led to second-quarter earnings of $92 million (16 cents per share), compared to a profit of $1.4 billion ($2.72) during the first quarter, and $911 million ($1.97) during the second quarter of 2011. The first-quarter results included a bargain purchase gain of $594 million, related to the company’s purchase of ING Direct (USA) from ING Groep (NYSE:ING).
Moving forward, investors would love to see a couple of “clean quarters” from Capital One, and the consensus among analysts is for the company to show profits of $1.70 a share in the third quarter, and $1.65 in the fourth quarter.
Like other major credit card lenders, Capital One reports monthly credit quality statistics, and the addition of the HSBC card portfolio — along with the second-credit marks made when the portfolio was purchased — led to sharp improvement in the company’s card quality ratios, which are expected to reverse to some extent over coming quarters, as the special reserve for the acquired HSBC loans is used up.
During July, Capital One’s annualized rate of net charge-offs to average domestic card loans was 2.62%, declining from 3.41% in June, and 3.37% in July 2011. Early-stage delinquencies also declined, with loans past due 30 days or more making up 3.16% of the domestic card portfolio as of July 30, flat with the previous month, and better than the 3.37% a year earlier.
Capital One’s average domestic credit card loans held for investment totaled $80.6 billion, increasing from $53.3 billion the previous month, because of the HSBC portfolio purchase. Net charge-offs — loan losses less recoveries — in the domestic card portfolio during July were $175 million, increasing from $151 million in June, but declining from $198 million a year earlier, when average domestic card loans totaled $53.8 billion.
Capital One also reported improved credit quality in its $8.8 billion international credit card portfolio, with a net charge-off rate of 4.97% during July, improving from 5.16% in June, and 6.59% in July of last year. The 30+ days delinquency rate in the international credit card portfolio improved to 4.78% in July, from 4.84% the previous month, and 5.34% a year earlier.
Capital One’s shares have moved ahead nicely so far during a transformational 2012, following the drag in the second half of last year, as the regulatory approval process for the ING Direct and HSBC card portfolio acquisitions dragged on and on. The shares remain cheaply priced to forward earnings estimates, and with a strong capital base and hopefully a smooth second half to show the benefits from the two acquisitions, investors can look forward to a capital return through an increased dividend and/or share buybacks during 2013.