Back to top

Image: Bigstock

Capital One (COF) Up 3.1% Since Last Earnings Report: Can It Continue?

Read MoreHide Full Article

A month has gone by since the last earnings report for Capital One (COF - Free Report) . Shares have added about 3.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Capital One due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Capital One Q1 Earnings & Revenues Beat Estimates, Costs Rise

Capital One’s first-quarter 2019adjusted earnings of $2.90 per share easily surpassed the Zacks Consensus Estimate of $2.68. Also, it compared favorably with the year-ago quarter’s adjusted earnings of $2.65.

Results benefited from rise in revenues, improving deposit balances and strength in card business. However, rise in provision for credit losses, lower loan balances and an increase in operating expenses hurt the results to some extent.

After taking into consideration the non-recurring items, net income available to common shareholders was $1.35 billion or $2.86 per share, up from $1.28 billion or $2.62 per share in the prior-year quarter.

Revenues & Expenses Rise

Net revenues were $7.08 billion, up 3% year over year. The figure beat the Zacks Consensus Estimate of $7.01 billion.

Net interest income inched up 1%to $5.79 billion. However, net interest margin decreased 7 basis points (bps) to 6.86%.

Non-interest income increased 8% year over year to $1.29 billion. Thisrise was driven by highernet interchange fees, other income and net securities losses, partially offset by decline in service charges and other customer-related fees.

Non-interest expenses of $3.67 billion were up 3%, mainly owing to 25% increasein marketing costs and 39% surge in professional services costs.

Efficiency ratio was 51.83% compared with 51.72% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.

As of Mar 31, 2019, loans held for investment were $240.3 billion, down 2% from the prior quarter. However, total deposits as of the same date increased 2% sequentially to $255.11 billion.

Credit Quality: A Mixed Bag

Net charge-off rate increased 5 bps year over year to 2.64%. Also, provision for credit losses rose 1% to $1.69 billion. Likewise, the 30-plus day performing delinquency rate increased 51 bps year over year to 3.23%. However, allowance as a percentage of reported loans held for investment was 3.04%, down 1 bp.

Strong Profitability & Capital Ratios

Return on average assets was 1.52% at the end of the reported quarter, up from 1.48% in the year-ago quarter. Also, return on average common equity was 11.13%, down from 11.47% in the prior-year quarter.

As of Mar 31, 2019, Tier 1 risk-based capital ratio was 13.4%, up from 12.0% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 11.9% as of Mar 31, 2019, up from 10.5% on Mar 31, 2018.

Outlook

Management expects the impact of on boarding of the acquisition of Walmart’s co-branded and private label credit card receivables to be a modest benefit to NCO rate of domestic card business.

Operating efficiency ratio net of adjustments is expected to improve modestly in 2019 and 2020, excluding the one-time Walmart launch and integration expenses. In 2021, operating efficiency ratio net of adjustments is expected to improve to 42%.

In 2019, the company expects to incur nearly $225 million in one-time expenses to launch the new originations programs and integrate the acquired portfolio. These expenses include technology investments and one-time costs related to hiring and training operational staff, and managing the surge of activities related to the conversion and launch.

The company expects further increases in average deposit interest rate going forward as product mix shift continues. Also, increasing competition for deposits will put upward pressure on deposit rates. The company believes that increasing deposit costs will be a headwind to its net interest margin going forward.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Capital One has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Capital One has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Capital One Financial Corporation (COF) - free report >>

Published in