Among the 79 or so second quarter earnings reports released on Tuesday, one of particular note was that of Capital One, the credit card and banking behemoth of "last resort" for many.
The company is well-known for its marketing campaign slogan, "What's in Your Wallet" and is also a lender to many who may not qualify for a credit card or auto loan from more traditional loan originators such as the major banks, thus rendering it to a largely "sub-prime" status.
Thus, when the firm released second quarter results after the closing bell on Tuesday, there was a chorus of "told you so" types who saw Capital One's demise in the making months prior.
The company recorded a quarterly loss of $918 million, or $2.21 a share, compared with a profit of $1.63 billion, or $3.24 a share in the year-ago period on a GAAP basis.
Notably, Capital One boosted its provision for credit losses to $4.25 billion from $1.34 billion in the year-earlier period. It also reported $1.51 billion in net charge-offs. That's $1.5 billion of defaults across all of their business units, but in particular, credit cards.
Total net revenue fell to $6.56 billion from $6.business unit.96 billion a year earlier. Analysts targeted $9.22 billion. Those analysts have yet to be fired, but are likely nervous and rapidly revising their third quarter estimates on the consumer lending giant.
Net interest margin, was 5.78%, compared with 6.80% a year ago, a significant decline.
During the conference call, company representatives touted the effectiveness of their forbearance provisions during the COVID crisis. Borrowers were allowed to skip payments on credit cards, home loans, car loans. In its earnings report presentation, the company offered: "As of June 30, 2020, we have assisted 2% of active accounts,
representing 3% of loans outstanding."
Those 2%, 3% figures are leading numbers. When those figures reach 4% to 5%, Capital One will be in dire straits, because of the declining net interest margin, which is heading south of 5% in the current quarter. Capital One also reported that 92% of customers seeking forbearance were current. Put another way, 8% of those were already 30 days delinquent. With net interest margins collapsing and more people expected to go into delinquent status, Capital One will have to provision even more toward credit losses in the third quarter.
Capital One has become the canary in the coal mine for the banking industry, specifically, consumer-oriented banks, like Wells Fargo, Bank of America, Citi, and JP Morgan Chase. When the dominoes begin to fall, expect Capital One to be among the first, if not THE first, to tip over.
Combined with the 3.10 loss in the first quarter, Capital One's price/earnings ratio fell from a high of around 26 to 12 after last quarter to N/A this quarter, as, on a twelve-trailing-month (TTM) basis, they've lost 26 cents per share over the past year.
The current quarter doesn't look very promising for the company either. They lowered their dividend for the third quarter from 40 cents to 10. When they report their third quarter results on or about October 21, expect the dividend to be reduced to zero.
Like Countrywide, the sub-prime mortgage darling prior to the GFC of 2007-09, Capital One may be forced at some time to sell off business segments. If one were to ask the executives at Capital One "what's in your wallet?" the answer would be, appropriately, "other people's money." And if one were to extrapolate out how that's going to work when millions of their customers are out of work, the correct answer would be "not well."
Oh, well, just another banking crisis the Fed plans on postponing until just before the November elections. COVID-19 and the government response is gearing up for an exciting fall presentation.
Meanwhile, silver and gold continue a rally that has now caught the attention of the financial media, at last. The last time CNBC talked about precious metals was back in Spring of 2011, when gold and silver were headed to all-time highs. A mania was underway.
In October, 2008, when everything was crashing, silver bottomed out at $8.88 an ounce, and gold fell to 712.50.
By the peak in 2011, silver checked in at $48.70, more than a five-bagger by April, and gold struck $1895.00 in September. Now, the shining sisters are back for Act Two.
Silver was slammed down to $12 an ounce in March, but has rebounded smartly. On July 2nd it stood at $17.93. It's currently trading above $22, hitting $22.50 on futures markets overnight.
Also in March, gold got smacked down to $1474.25. Overnight, gold futures hit $1862.50, just $32 short of it's record closing high. As of this writing, gold futures are trending at $1858.90.
While gold and silver aren't exactly what people carry around with them (they used to be), astute followers of currencies and real money might want a couple of one ounce silver coins and a few gram-denominated gold pieces in their wallets.
At the Close, Tuesday, July 21, 2020:
Dow: 26,840.40, +159.53 (+0.60%)
NASDAQ: 10,680.36, -86.73 (-0.81%)
S&P 500: 3,257.30, +5.46 (+0.17%)
NYSE: 12,508.68, +115.70 (+0.93%)
Showing posts with label GAAP. Show all posts
Showing posts with label GAAP. Show all posts
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