Capital One Financial's (COF) fourth quarter earnings were satisfactory, according to Fitch Ratings. The company's return on average assets (ROA) clocked in at 1.27%, lower than the sequential quarter, but an improvement relative to the year-ago quarter. Similarly the company's return on average equity (ROE) was 8.61%, down from 10.12% in the sequential quarter, but up from 8.27% in the year-ago quarter.
Fitch notes that this result is below the company's long-term averages. This quarter's ROE was impacted in particular by higher provision expense related to the company's loan growth as well as higher expenses due in large part to higher marketing expenses. That said, the higher marketing expense likely helped drive some loan growth on the quarter.
COF's net interest margin (NIM) improved to 6.81% in 4Q'14 due to a higher mix of credit card receivables in the loan portfolio due to some credit card loan growth as well as the continued run-off of acquired home loans. Should loan growth continue, Fitch would expect this to continue as long as card receivables continue to expand at a similar or greater rate.
As noted, loan growth was a bright spot for COF. Total loans grew 3% and 6% relative to the sequential and year-ago quarters respectively. In particular, credit card loans (both domestic and international) grew 7% relative to the sequential quarter and 6% relative to the year-ago quarter. Similarly, auto loans grew 4% relative to the sequential quarter and 19% relative to the year ago quarter, as COF continue to move up into the prime auto lending space.
However, the loan growth was largely offset by a 4% sequential decline in home loan and a 15% decline in home loans on a year-over-year basis. Fitch would expect home loans to continue running off.
Fitch notes that COF's overall credit quality remains at or near a cyclical trough. This is particularly true in auto lending, credit card lending, as well as commercial lending. Fitch would expect some reversion in COF's -- as well as the rest of the industry's -- credit metrics over time.
In Fitch's opinion the company's funding profile remains good, and has continued to evolve towards a higher reliance on deposit funding and away from wholesale funding over the last several years. Total deposits now constitute nearly 78% of total liabilities.
Fitch considers COF's capital ratios to be good. The company's Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach, COF's binding constraint, remains above 8%. This combined with continued good earnings performance helps to support the company's ratings and offset some of the consumer-related concentration risk in the loan portfolio.
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