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High Rates, Strategic Buyouts Aid Capital One Amid Weak Asset Quality
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Capital One Financial Corporation (COF - Free Report) remains well-positioned for growth on the back of strategic acquisitions, high rates, a strong balance sheet and a solid Credit Card segment. However, an elevated expense base and worsening asset quality remain challenges.
Capital One’s Growth Drivers
Opportunistic Acquisitions: Capital One has been engaged in strategic acquisitions to boost its revenues. This February, the company agreed to purchase Discover Financial in a 100% stock deal for $35.3 billion. This move aims to transform the credit card industry landscape by establishing a major player to unlock substantial shareholder value.
In June 2023, COF acquired Velocity Black to enhance its delivery of remarkable customer experience through its innovative technology. Further, in 2021, the company took over TripleTree, LLC, while in 2019, it acquired KippsDeSanto. Moreover, the acquisitions of Beech Street Capital and GE's healthcare unit demonstrate the company’s revenue diversifying efforts.
While the company’s revenues dipped marginally in 2020, the same reflected a five-year (2018-2023) compound annual growth rate (CAGR) of 5.6%. The uptrend continued during the first six months of 2024. Solid credit card and online banking businesses, alongside decent loan demand, keep the company’s revenue prospects encouraging.
Revenue Trend
Image Source: Zacks Investment Research
The company’s net loans held for investment reflected a four-year CAGR of 4.2% for the year ended 2023. We project total revenues and net loans held for investment to grow 4.4% and 3.4% in 2024, respectively.
High Rates to Aid Net Interest Margin: While rising funding costs are anticipated to exert pressure on Capital One’s net interest margin (NIM) growth to some extent, the current high-interest rate scenario will offer support. Hence, the company’s net interest income (NII) and NIM will likely improve going forward.
The company’s NII reflected an 8.5% CAGR over the three years ended 2023, with the uptrend continuing in the first half of 2024. Though NIM fell in 2023, the metric rose in the first six months of 2024.
NII & NIM Trends
Image Source: Capital One Financial Corp.
We project NII to witness a CAGR of 3.9% by 2026. The company’s NIM is projected to be 6.77% in 2024, 6.88% in 2025 and 7.07% in 2026.
Solid Balance Sheet: As of June 30, 2024, COF’s total debt (comprising securitized debt obligations and other debt) was $50 billion, and the total cash and cash equivalents were $45.4 billion.
Further, the company enjoys investment-grade credit ratings of Baa1, BBB and A- from Moody’s Investors Service, Standard and Poor’s and Fitch Ratings, respectively, enabling greater accessibility to debt markets.
A strong liquidity profile and earnings strength enable the company to address its debt obligations in the near term, even if economic turmoil occurs.
Strong Credit Card Segment Operations: Capital One’s Credit Card segment is likely to remain solid. Though the company ceased its card partnership with Walmart recently, the 2017 acquisition of Cabela's Incorporated’s credit card operations bodes well for the future.
The Domestic Credit Card division, which accounted for 94.6% of Credit Card net revenues in 2023, witnessed a rise in loans held for investment. Robust growth opportunities in card loans and purchase volumes are anticipated despite an intense competitive environment. Our estimates for the Domestic Credit Card division reflect a CAGR of 4.4% by 2026.
Challenges for COF
Deteriorating Asset Quality: Capital One’s worsening credit quality remains a concern. Provision for credit losses and net charge-offs (NCOs) have risen amid the tough operating backdrop. While the company recorded a provision benefit in 2021, the metric witnessed a 12.2% CAGR over the five years ended 2023. The uptrend continued in the first half of 2024.
NCOs dipped in 2018, 2020 and 2021 while reflecting an increase in 2019, 2022, 2023 and the first six months of 2024. The company’s credit quality will likely remain under pressure in light of the tough macroeconomic outlook.
We project provision for credit losses to rise 16.7.8% in 2024. NCOs are expected to witness a year-over-year increase of 25.7% in 2024.
Elevated Expenses: COF’s expenses have been rising over the past few years. While expenses dipped in 2020, the same witnessed a 6.4% CAGR over the last five years (2018-2023), with the uptrend persisting in the first half of 2024.
Expense Growth Trend
Image Source: Zacks Investment Research
The rise has been primarily due to higher marketing costs (reflecting a 13% CAGR over the same period) and inflationary pressure. Expenses are likely to stay elevated amid the company’s ongoing investments in technology and infrastructure and inorganic expansion efforts.
This will exert pressure on annual operating efficiency in the near term. We project total non-interest expenses to increase 2.4%, 5.7% and 3.5% in 2024, 2025 and 2026, respectively.
COF currently carries a Zacks Rank #3 (Hold). Year to date, shares of the company have gained 16.1%, underperforming the industry’s growth of 17.6%.
Estimates for PRG’s current-year earnings have been revised 12.1% upward in the past 60 days. The company’s shares have surged 45.3% in the past six months.
Estimates for EZPW’s current-year earnings have been revised 1.8% upward in the past two months. The company’s shares have lost 0.1% in the past six months.
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High Rates, Strategic Buyouts Aid Capital One Amid Weak Asset Quality
Capital One Financial Corporation (COF - Free Report) remains well-positioned for growth on the back of strategic acquisitions, high rates, a strong balance sheet and a solid Credit Card segment. However, an elevated expense base and worsening asset quality remain challenges.
Capital One’s Growth Drivers
Opportunistic Acquisitions: Capital One has been engaged in strategic acquisitions to boost its revenues. This February, the company agreed to purchase Discover Financial in a 100% stock deal for $35.3 billion. This move aims to transform the credit card industry landscape by establishing a major player to unlock substantial shareholder value.
In June 2023, COF acquired Velocity Black to enhance its delivery of remarkable customer experience through its innovative technology. Further, in 2021, the company took over TripleTree, LLC, while in 2019, it acquired KippsDeSanto. Moreover, the acquisitions of Beech Street Capital and GE's healthcare unit demonstrate the company’s revenue diversifying efforts.
While the company’s revenues dipped marginally in 2020, the same reflected a five-year (2018-2023) compound annual growth rate (CAGR) of 5.6%. The uptrend continued during the first six months of 2024. Solid credit card and online banking businesses, alongside decent loan demand, keep the company’s revenue prospects encouraging.
Revenue Trend
Image Source: Zacks Investment Research
The company’s net loans held for investment reflected a four-year CAGR of 4.2% for the year ended 2023. We project total revenues and net loans held for investment to grow 4.4% and 3.4% in 2024, respectively.
High Rates to Aid Net Interest Margin: While rising funding costs are anticipated to exert pressure on Capital One’s net interest margin (NIM) growth to some extent, the current high-interest rate scenario will offer support. Hence, the company’s net interest income (NII) and NIM will likely improve going forward.
The company’s NII reflected an 8.5% CAGR over the three years ended 2023, with the uptrend continuing in the first half of 2024. Though NIM fell in 2023, the metric rose in the first six months of 2024.
NII & NIM Trends
Image Source: Capital One Financial Corp.
We project NII to witness a CAGR of 3.9% by 2026. The company’s NIM is projected to be 6.77% in 2024, 6.88% in 2025 and 7.07% in 2026.
Solid Balance Sheet: As of June 30, 2024, COF’s total debt (comprising securitized debt obligations and other debt) was $50 billion, and the total cash and cash equivalents were $45.4 billion.
Further, the company enjoys investment-grade credit ratings of Baa1, BBB and A- from Moody’s Investors Service, Standard and Poor’s and Fitch Ratings, respectively, enabling greater accessibility to debt markets.
A strong liquidity profile and earnings strength enable the company to address its debt obligations in the near term, even if economic turmoil occurs.
Strong Credit Card Segment Operations: Capital One’s Credit Card segment is likely to remain solid. Though the company ceased its card partnership with Walmart recently, the 2017 acquisition of Cabela's Incorporated’s credit card operations bodes well for the future.
The Domestic Credit Card division, which accounted for 94.6% of Credit Card net revenues in 2023, witnessed a rise in loans held for investment. Robust growth opportunities in card loans and purchase volumes are anticipated despite an intense competitive environment. Our estimates for the Domestic Credit Card division reflect a CAGR of 4.4% by 2026.
Challenges for COF
Deteriorating Asset Quality: Capital One’s worsening credit quality remains a concern. Provision for credit losses and net charge-offs (NCOs) have risen amid the tough operating backdrop. While the company recorded a provision benefit in 2021, the metric witnessed a 12.2% CAGR over the five years ended 2023. The uptrend continued in the first half of 2024.
NCOs dipped in 2018, 2020 and 2021 while reflecting an increase in 2019, 2022, 2023 and the first six months of 2024. The company’s credit quality will likely remain under pressure in light of the tough macroeconomic outlook.
We project provision for credit losses to rise 16.7.8% in 2024. NCOs are expected to witness a year-over-year increase of 25.7% in 2024.
Elevated Expenses: COF’s expenses have been rising over the past few years. While expenses dipped in 2020, the same witnessed a 6.4% CAGR over the last five years (2018-2023), with the uptrend persisting in the first half of 2024.
Expense Growth Trend
Image Source: Zacks Investment Research
The rise has been primarily due to higher marketing costs (reflecting a 13% CAGR over the same period) and inflationary pressure. Expenses are likely to stay elevated amid the company’s ongoing investments in technology and infrastructure and inorganic expansion efforts.
This will exert pressure on annual operating efficiency in the near term. We project total non-interest expenses to increase 2.4%, 5.7% and 3.5% in 2024, 2025 and 2026, respectively.
COF currently carries a Zacks Rank #3 (Hold). Year to date, shares of the company have gained 16.1%, underperforming the industry’s growth of 17.6%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Other Consumer Loan Stocks Worth Considering
Some better-ranked finance stocks worth considering are PROG Holdings, Inc. (PRG - Free Report) and EZCORP, Inc. (EZPW - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
Estimates for PRG’s current-year earnings have been revised 12.1% upward in the past 60 days. The company’s shares have surged 45.3% in the past six months.
Estimates for EZPW’s current-year earnings have been revised 1.8% upward in the past two months. The company’s shares have lost 0.1% in the past six months.