MW Here's why Capital One and other banks took 'rainy day' money off their balance sheets

By Steve Gelsi

Improved credit quality at Capital One allowed the company to channel more money to earnings

$Capital One Financial Corp(COF-N)$.'s customers continued to spend last quarter, and the company ended up releasing money it had set aside for losses on loans.

In doing so, Capital One $(COF)$ joined Synchrony Financial (SYF), American Express Co. $(AXP)$ and other financial firms in sending a confident signal about the health of their businesses.

Despite big swings in the financial markets and worries about a recession, Capital One's first-quarter provision for credit losses - money it sets aside for troubled transactions - was $2.37 billion in the quarter, down from $2.64 billion in the previous quarter and much lower than the $2.8 billion expectation from analysts.

Read: Capital One says consumers are doing OK. Here's where they may be trying to beat tariffs.

That $273 million included a $123 million release of reserves to its bottom line, as well as a $148 million drop in net charge-offs, which is money from credit-card loans and other loans that it doesn't expect to be paid back.

Capital One echoed comments from other banks about robust consumer activity, a positive trend in the quarter.

Truist analyst Brian Foran noted that $Synchrony Financial(SYF-B)$, American Express and Ally Financial Inc. (ALLY) all released reserves, along with big banks that have large credit-card businesses like $Bank of America Corp(BAC-N)$. $(BAC.SI)$

To be sure, JPMorgan Chase & Co. $(JPM)$ did build up its reserves in the quarter, however.

"If I look across credit cards and auto [loans], several of them released reserves based primarily on delinquencies declining in their book," Foran said in an email to MarketWatch. "Really, it was just JPMorgan who took a meaningful reserve build."

Like other banks, Capital One's decision whether to beef up or trim down its reserves depended partly on how much money it had already set aside at the start of the quarter, as well as its outlook for how consumers will perform in the economy going forward.

On this front, Capital One saw few if any clouds on the horizon based on consumer-spending trends observed in April. While there was some weakness in airfare spending, spending on cars and electronics has been robust.

Capital One's stock was up more than 4% on Wednesday.

"There has been no real change in trend recently in reaction to tariffs and macro fears," Truist analyst Foran said in a research note. "If anything, April has ticked up a bit" from the first quarter.

Foran said investors may not like to see Capital One reducing its provisions heading into a potentially rocky economic environment, but the firm's move was supported by the greater-than-expected drop in net charge-offs.

"Some may complain that Capital One released reserves, although in fairness charge-offs beat consensus too, particularly in auto," Foran said. "The reserve release would have been even bigger this quarter if it was just down to the [credit] performance of the book."

In the first quarter, Capital One said it released $548 million in allowances for loan losses in its domestic credit-card business, due to "continued favorable credit performance."

Capital One did boost its commercial banking loan-loss allowance by $117 million due to "heightened uncertainty, as well as specific reserves for a small number of individual credits."

U.S. card delinquencies also fell by 23 basis points during the quarter. That compared with a drop of 8 basis points in the previous quarter.

Capital One's preprovision net revenue (PPNR) came in 5% below analyst expectations, while expenses rose, Truist analyst Foran said.

HSBC analyst Saul Martinez reiterated a hold rating on Capital One's stock and said the company's "credit quality continues to impress" with healthy growth in net interest income, although expenses were higher than estimates.

Citigroup analyst Keith Horowitz reiterated a buy rating on Capital One's stock and said the company posted a "mixed quarter with elevated expenses accompanied by continued improvement of credit trends."

Mike Taiano, a Moody's analyst, noted that Capital One had a larger decline than its peers on its 30-plus-day loan delinquency rate in its domestic credit-card business.

Overall, delinquency rates have been flat to down for the largest credit-card issuers, he said.

"Although the loan-loss provision declined [industrywide] both quarter on quarter, and year on year, the allowance coverage ratio (allowance as a percentage of loans) was relatively flat despite the improving delinquency trends," Taiano said.

Capital One last week won clearance from federal regulators to acquire Discover Financial Services $(DFS)$. The deal is expected to close in May.

-Steve Gelsi

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April 23, 2025 13:36 ET (17:36 GMT)

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