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What's in the Cards for Capital One (COF) in Q2 Earnings?

Zacks Equity Research

Capital One COF is scheduled to announce second-quarter 2019 results on Jul 18, after market close. Its earnings and revenues are projected to decline year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from rise in revenues, improving deposit balances and strength in card business, partially offset by higher costs and provisions.

Capital One has an impressive earnings surprise history. Its earnings surpassed estimates in three of the trailing four quarters, the average positive surprise being 4.1%.

Capital One Financial Corporation Price and EPS Surprise

 

Capital One Financial Corporation Price and EPS Surprise

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

Nonetheless, the company’s activities in the second quarter were not enough to win analysts’ confidence. As a result, the Zacks Consensus Estimate for earnings of $2.84 moved slightly lower over the past 30 days. It indicates fall of 11.8% from the year-ago reported figure. Also, the consensus estimate for revenues of $7 billion suggests 2.6% decline.

Factors to Impact Q2 Results

Modest improvement in net interest income (NII): Per the Fed’s latest data, consumer loans, specially credit card loans recorded decent growth in the second quarter. This along with Capital One’s efforts to further strengthen its card operations and higher interest rates will support NII to some extent.

Further, the Zacks Consensus Estimate for average interest earning assets of $338 billion suggests a 1.3% rise from the year-ago reported figure. However, flattening of the yield curve and higher deposit betas are likely to slightly hamper growth. Thus, NII is likely to record a slight rise.

Slight fee income growth: Capital One is expected to record an increase in fee income in the to-be-reported quarter. As the quarter might have witnessed an increase in card usage, interchange fees (major part of its fee income) are expected to rise.

Expenses to rise: Operating expenses are expected to trend upward in the to-be-reported quarter. Specifically, marketing expenses will likely remain elevated with rising loan growth opportunities.

In Domestic Card business, management expects to incur about $225 million in one-time expenses in 2019 as it seeks to launch the new Walmart originations programs and integrate the acquired portfolio. The impact of this is likely to be reflected in the second quarter as well.

Asset quality to worsen: While improvement in card loans is leading to an increase in interest income, Capital One will continue witnessing a rise in credit card delinquency rates. Also, the charge-off rate in auto finance business might increase.

Now, let’s have a look at what our quantitative model predicts:

The chances of Capital One beating the Zacks Consensus Estimate in the second quarter are less. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Capital One is -0.13%.

Zacks Rank: Capital One currently has a Zacks Rank #3. This increases the predictive power of ESP but we need to have positive ESP to be sure of an earnings beat.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming release.

Comerica Incorporated CMA is scheduled to release results on Jul 17. It has an Earnings ESP of +0.52% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corporation MTB is scheduled to release results on Jul 18. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.20%.

The Earnings ESP for PNC Financial PNC is +0.88% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 17.

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