Capital One Financial (NYSE:COF) delivered stronger-than-expected adjusted earnings for the second quarter, despite reporting a steep net loss tied to its recent acquisition of Discover Financial Services. The company’s $35.3 billion all-stock acquisition, finalized in May, made it the largest credit card issuer in the U.S. by outstanding balances.
Earnings Overview
The firm posted adjusted earnings per share of $5.48, handily surpassing analyst forecasts of $4.03. However, on a GAAP basis, Capital One recorded a net loss of $4.3 billion, or $8.58 per share, driven primarily by an $8.77 billion initial allowance for Discover’s non-PCD (purchased credit deteriorated) loans.
Revenue climbed 25% quarter-over-quarter to hit $12.5 billion, though it came in slightly under the $12.72 billion consensus. The Discover acquisition contributed to a notable expansion in both loan and deposit volumes.
Shares of Capital One gained 3.4% in premarket trading following the release.
Analyst Reaction
“While there is a lot of noise in Q2 reporting from acquisition integration costs, the overall story remains compelling, in our view,” wrote Bank of America analysts in a post-results note.
They added, “We see significant optionality around the closed loop network that could materially enhance the product offering and competitive positioning of Capital One.”
Key Performance Metrics
The acquisition significantly boosted Capital One’s balance sheet. Loans at the end of the period surged 36% to $439.3 billion, while credit card balances spiked 72% to $269.7 billion. Total deposits rose 27% to $468.1 billion, supporting a strong liquidity profile.
CEO Commentary
“We completed our acquisition of Discover on May 18th. We’re fully mobilized and hard at work on integration which is going well,” said Richard D. Fairbank, Capital One’s Chairman and CEO.
The company saw its most substantial growth in credit card and consumer lending, supported by a healthy CET1 capital ratio of 14.0%. Net interest margin improved by 69 basis points, reaching 7.62%, aided by the current high-rate environment.
Expenses and Outlook
Non-interest expenses increased 18% to $7.0 billion, reflecting the impact of one-time acquisition-related charges. These included $299 million in direct Discover integration costs and $255 million in intangible amortization expenses.
“We’re as excited as ever by the expanding set of opportunities to grow and create value as a combined company,” Fairbank added.
Capital One expects to generate $2.7 billion in cost synergies by 2027 and continues to prioritize digital investments to boost operational efficiency.
Capital Plans
While analysts at Morgan Stanley noted they had anticipated more detail on the bank’s internal capital framework this quarter, they acknowledged that clarity may come in the next few months.
“We still believe COF can ramp buybacks modestly starting this quarter now that the deal has closed, with a more meaningful ramp in Q4 once COF completes its internal capital review,” they wrote.
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