Consumer banking segment’s revenue rises 1%
Capital One’s (COF) Consumer Banking segment’s ending loans were up ~1% YoY (year-over-year) in 1Q15, as the growth in auto loans was offset by runoff in the mortgage portfolio. The segment’s auto originations increased ~10% YoY—driven by strong auto sales and the bank’s deepening relationships with its existing dealers.
The Consumer Banking segment’s revenue was up 1% YoY—driven by growth in auto loans. The segment’s revenue was still pressured by the sustained low interest rates on the deposit business, declining mortgage balances, and margin compression in auto loans.
The bank expects persistently low interest rates to continue to impact returns in deposit businesses, even if interest rates begin to rise in 2015. Capital One forms ~1.5% of the Financial Select Sector SPDR ETF (XLF). The above graph compares the segment’s revenue and net income in the quarter with the previous quarter and the same quarter last year.
Cautious in underwriting
In the quarter, the provision for credit losses grew as growth in auto loans and normalizing auto credit drove an allowance build. Delinquency rates increased in the auto loans segment over the last few quarters. Capital One also recorded slightly higher losses on newer originations. Capital One continues to be cautious on auto industry underwriting, resulting in almost flat subprime originations for nearly two years.
Capital One’s chairman, president, and CEO—Richard D. Fairbank—noted during the earnings call for 1Q15 that, “In the first quarter, we observed increasingly aggressive underwriting practices by some competitors, particularly in subprime. We are losing some contracts to competitors who are making more aggressive underwriting choices.”
The bank plans to continue to pursue opportunities in auto lending, while being cautious. It intends to add new dealers and gain a greater share of prime originations with existing dealers.