Banking, finance, and taxes
Uber, Autos and Oil Are Responsible for Capital One Earnings Miss
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Capital One Financial Corp. (NYSE: COF) reported earnings Tuesday, April 26, missing estimates by eight cents a share, or 4%. The stock fell over 1.5% in afterhours trading. The miss though says a lot more about the turmoil in taxi medallions, auto loans and the energy sector than it does about Capital One itself. Revenues, after all, were up 10% year over year and 0.5% sequentially.
Capital One’s bottom line miss is a result of the firm preemptively protecting itself against expected defaults from weakened industries. Provision for loan losses increased 63% year over year and 11% sequentially. For the longer term, this is good strategy, though it disappoints shareholders in the short term.
The first culprit is the energy loan portfolio. The rate of nonperforming loans skyrocketed from last quarter to nearly 20% from 8.24% just last quarter. In the first quarter of 2015, nonperforming energy loans were only 0.19%. This means that bankruptcies are starting to kick in. We should see this rate continue to rise as the industry gets cleared out due to sub-$50 oil prices that probably will persist for some time. Once the rate peaks though, it will drop dramatically as bankruptcies set in regardless of oil prices. So while the decline here is a result of falling oil, Capital One is not dependent on an oil recovery, as it can simply shift resources to other sectors.
Another surprising culprit in the increase in loan loss provisions is Uber and other ride-sharing applications. As taxis get less and less business due to encroachment from Uber drivers, ever fewer taxi drivers can afford to pay back their medallion loans, and that is exactly what’s happening. Medallion loans make up slightly less than 3% of Capital One’s total loan portfolio.
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