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Capital One (COF) Gains From Buyouts, Card Business, Costs Rise

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Capital One’s COF strategic acquisitions and rise in demand for consumer loans are anticipated to keep supporting financials in the quarters ahead. However, relatively lower interest rates, mounting costs and deteriorating asset quality are near-term concerns.

Opportunistic buyouts and improving loan balance have been supporting Capital One’s revenues. Over the last five years (ended 2021), the same witnessed a CAGR of 2.8%. The company’s revenues are projected to grow 8.7% and 6.5% for 2022 and 2023, respectively.

In 2021, COF acquired TripleTree, LLC, which will further enhance its investment banking capabilities. In 2019, it had forayed into the merger and acquisitions (M&As) market with the KippsDeSanto buyout. These, along with past acquisitions, reflect Capital One’s revenue diversifying efforts. Revenue prospects look encouraging on the back of the company’s solid credit card and online banking businesses.

Similar to Capital One, other consumer loan providers, including Ally Financial ALLY and SLM Corporation SLM, have been undertaking measures to improve the top line. In December 2021, Ally Financial acquired the digital-first credit card company, Fair Square Financial. The deal will advance ALLY's evolution as the leading digital consumer bank providing frictionless, innovative products to its growing customer base.

Likewise, this January, SLM Corporation inked a deal with Epic Research to acquire a digital marketing and education solutions company, Nitro. The deal will amplify SLM’s digital marketing ambit and advance its position as a comprehensive education solutions provider for students.

Apart from this, COF’s capital-deployment initiatives look encouraging. The company has been paying 60 cents per share as quarterly dividend since August 2021. Also, for 2022, it has authorized a share repurchase program of up to $5 billion. Earlier in 2020, per the Federal Reserve’s requirements, it had slashed quarterly dividend by 50% and suspended share repurchased to preserve liquidity amid the coronavirus pandemic.

Analysts seem to be bullish on the company’s prospects. The Zacks Consensus Estimate for 2022 and 2023 earnings has been revised 2.6% and 1.4% upward, respectively, over the past month. Capital One currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, over the past year, shares of COF have rallied 33.6%, outperforming the industry’s growth of 23%.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

However, Capital One’s asset quality has been deteriorating. Provision for credit losses and net charge-offs have been steadily rising. The company’s overall credit quality is likely to remain under pressure given the increasing loan balance. Also, relatively lower interest rates are expected to put pressure on the net interest margin in the near term.

Further, Capital One has been witnessing a persistent rise in expenses. Though expenses declined in 2020, the same witnessed a CAGR of 3.9% for the last five years (2017-2021). Management expects that rise in the cost of modern tech talent, along with continued investments in growth opportunities, will put pressure on annual operating efficiency in the near term.

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