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Capital One (COF) Up 14.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Capital One (COF). Shares have added about 14.5% 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 its most recent earnings report in order to get a better handle on the important drivers.

Capital One Records Q1 Loss, Provisions Surge & Revenues Rise

Capital One’s first-quarter 2020 adjusted loss was $3.02 per share against the Zacks Consensus Estimate for earnings of $2.56. The year-ago quarterly earnings were $2.90 per share.

The results reflect a drastic surge in provisions amid coronavirus-related mayhem. Further, decline in loan balance, rise in operating expenses and lower interest rates were headwinds. However, higher interest income and improvement in deposit balance offered some support.

After taking into consideration non-recurring items, net loss available to common shareholders was $1.42 billion or $3.10 per share versus net income of $1.35 billion or $2.86 per share in the prior-year quarter.

Revenues & Expenses Rise

Total net revenues were $7.25 billion, up 2% from the prior-year quarter. The figure missed the Zacks Consensus Estimate of $7.26 billion.

Net interest income grew 4% from the prior-year quarter to $6.03 billion. Net interest margin fell 8 basis points (bps) to 6.78% due to lower yields on interest-earning assets.

Non-interest income of $1.22 billion decreased 5% from the prior-year quarter. Lower service charges and other customer-related fees, and net interchange fees were the primary reasons for the decline.

Non-interest expenses of $3.73 billion were up 2% from the year-ago quarter, mainly owing to higher salaries and associate benefits costs, and occupancy and equipment costs.

Efficiency ratio was 51.44%, down from 51.83% in the year-ago quarter. A decrease in efficiency ratio indicates improvement in profitability.

As of Mar 31, 2020, loans held for investment were $263 billion, down 1% from the prior quarter. Total deposits, as of the same date, increased 3% sequentially to $269.7 billion.

Credit Quality Worsens

Provision for credit losses jumped significantly on a year-over-year basis to $5.42 billion.  The rise was largely due to economic uncertainty due to the coronavirus pandemic, and deterioration in the oil and gas industry.

Net charge-off rate increased 8 bps year over year to 2.72%. Also, allowance — as a percentage of reported loans held for investment — was 5.35%, up 231 bps.

However, the 30-plus day performing delinquency rate declined 28 bps to 2.95%.

Capital Ratios Improve

As of Mar 31, 2020, Tier 1 risk-based capital ratio was 13.7%, up from 13.4% in the comparable prior-year period. Further, common equity Tier 1 capital ratio was 12.0% as of Mar 31, 2020, up from 11.9% in the corresponding period of 2019.

Share Repurchase Update

During the quarter, Capital One repurchased 3.7 million shares. In mid-March, the company suspended its share buyback plan through second-quarter 2020.

Outlook

Owing to the concerns related to coronavirus outbreak and its impact, the company has withdrawn the 2020 efficiency ratio guidance provided earlier. Also, the company no longer expects efficiency ratio in 2021 to rise to 42%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted -75.57% due to these changes.

VGM Scores

Currently, Capital One has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Outlook

Capital One has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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