Capital One Downgraded to Neutral

Zacks

On Sep 3, 2013, we downgraded our long-term recommendation on Capital One Financial Corp. (COF) to Neutral from Outperform due to the persistent increase in operating expenses. Though the company’s second-quarter results were positive, we are concerned about limited margin growth, exposure to risky assets, and regulatory pressures.

Why the Downgrade?

Increasing operating expenses remain the primary concern for Capital One. Though expense control initiatives have helped the company offset higher credit losses in the past few years, operating expense has still been continuously increasing.

Moreover, any considerable improvement in Capital One’s credit quality seems unlikely in the near future, given the still sluggish economic recovery. While the credit performance of the commercial loan portfolio appears to be stabilizing, net charge-offs and nonperforming loans will likely fluctuate in the near term due to the present economic instability and acquisition of HSBC Holdings plc’s (HBC) U.S. credit card business.

Nevertheless, Capital One reported robust second-quarter earnings which came ahead of the Zacks Consensus Estimate. Results were driven by enhanced top line, partially offset by a rise in operating expenses. Moreover, in May 2013, the company increased its dividend by 500% to $0.30 per share.

The Zacks Consensus Estimate for 2013 advanced 4.0% to $6.82 per share over the last 60 days. Further, for 2014, the Zacks Consensus Estimate increased 1.6% to $6.80 per share over the same time period. Capital One currently carries a Zacks Rank #3 (Hold).

Other Stocks Worth Considering

Some better performing banks include Encore Capital Group, Inc. (ECPG) and SLM Corporation (SLM). Both these carry a Zacks Rank #2 (Buy).

Read the Full Research Report on COF

Read the Full Research Report on SLM

Read the Full Research Report on HBC

Read the Full Research Report on ECPG

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