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Capital One (COF) Stock Down 2.6% Despite Q3 Earnings Beat

Zacks Equity Research

Capital One’s COF third-quarter adjusted earnings of $3.32 per share easily surpassed the Zacks Consensus Estimate of $2.87. Also, it improved 6% year over year.

Results benefited from rise in non-interest income, improving loan and deposit balances, and strength in card business. However, a rise in credit cost, lower net interest income (owing to decline in interest rates) and higher operating expenses were the undermining factors. Perhaps, these concerns weighed on investors’ sentiments as Capital One’s shares declined 2.6% in aftermarket trading.

After taking into consideration non-recurring items, net income available to common shareholders was $1.27 billion or $2.69 per share, down from $1.44 billion or $2.99 per share in the prior-year quarter.

Revenues Stable, Expenses Rise

Net revenues were $6.96 billion, almost on par with the prior-year quarter level. The figure lagged the Zacks Consensus Estimate of $7.18 billion.

Net interest income declined 1% to $5.74 billion. Also, net interest margin decreased 28 basis points (bps) to 6.73%.

Non-interest income of $1.22 billion grew 4% from the prior-year quarter. Lower service charges and other customer-related fees was more than offset by rise in net interchange fees.

Non-interest expenses of $3.87 billion were up 3%, mainly owing to 14% increase in professional services costs and 12% rise in salaries and associate benefits costs.

Efficiency ratio was 55.64% compared with 54.19% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.

As of Sep 30, 2019, loans held for investment were $249.4 billion, up 2% from the prior quarter. Total deposits, as of the same date, increased 4% sequentially to $257.1 billion.

Credit Quality: Mixed Bag

Net charge-off rate decreased 3 bps year over year to 2.38%. The 30-plus day performing delinquency rate remained stable at 3.28%.

Also, allowance as a percentage of reported loans held for investment was 2.82%, down 20 bps. However, provision for credit losses rose 9% to $1.38 billion.

Profitability Ratios Decline, Capital Ratios Improve

Return on average assets was 1.42% at the end of the reported quarter, down from 1.66% in the year-ago quarter. Also, return on average common equity was 9.63%, down from 12.40% in the prior-year quarter.

As of Sep 30, 2019, Tier 1 risk-based capital ratio was 14.4%, up from 12.8% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.5% as of Sep 30, 2019, up from 11.2% on Sep 30, 2018.

Share Repurchase Update

During the third quarter, Capital One repurchased 5.3 million shares.

Our Take

Capital One’s strategic acquisitions over the years have positioned it well for long-term growth. While rise in credit costs and elevated expenses remain major near-term concerns, steady improvement in card business (leading to rise in interchange fees) is likely to aid profitability.

Capital One Financial Corporation Price, Consensus and EPS Surprise

 

Capital One Financial Corporation Price, Consensus and EPS Surprise

Capital One Financial Corporation price-consensus-eps-surprise-chart | Capital One Financial Corporation Quote

Currently, Capital One carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Consumer Loan Stocks

Ally Financial Inc.’s ALLY third-quarter 2019 adjusted earnings of $1.01 per share surpassed the Zacks Consensus Estimate of 98 cents. The bottom line came in 11% higher than the year-ago quarter’s reported figure.

Navient Corporation NAVI pulled off a positive earnings surprise of 10.7% in third-quarter 2019. Core earnings per share of 62 cents surpassed the Zacks Consensus Estimate of 56 cents. Also, the bottom line came in higher than the year-ago quarter figure of 53 cents.

Sallie Mae SLM delivered third-quarter 2019 positive earnings surprise of 16%. Core earnings of 29 cents per share surpassed the Zacks Consensus Estimate of 25 cents. Moreover, the figure jumped 24% from the prior-year quarter.

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