It has been about a month since the last earnings report for Capital One (COF). Shares have added about 5.8% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Capital One Q4 Earnings & Revenue Miss, Expenses Rise
Capital One’s fourth-quarter 2018 adjusted earnings of $1.87 per share lagged the Zacks Consensus Estimate of $2.40. However, it compared favorably with the year-ago quarter’s adjusted earnings of $1.62.
Results benefited from rise in net interest income and strength in card business. Further, a decline in provision for credit losses and improving loans and deposits were the tailwinds. However, lower non-interest income and an increase in operating expenses hurt the results to some extent.
After taking into consideration the non-recurring items, net income available to common shareholders was $1.17 billion or $2.48 per share against net loss of $1.05 billion or $2.17 per share in the prior-year quarter.
Adjusted earnings of $10.88 per share for 2018 missed the Zacks Consensus Estimate of $11.73. Nonetheless, it was above the prior year’s adjusted earnings of $7.74. After considering non-recurring items, net income available to common shareholders was $5.71 billion or $11.82 per share, up from $1.70 billion or $3.49 per share in 2017.
Revenues Stable, Expenses Rise
Net revenues in the reported quarter were $7.01 billion, relatively stable year over year. The figure missed the Zacks Consensus Estimate of $7.07 billion.
For2018, net revenues grew 3% to $28.08 billion. It was in line with the Zacks Consensus Estimate.
Net interest income was relatively stable year over year at $5.82 billion. However, net interest margin decreased 7 basis points (bps) to 6.96%.
Non-interest income declined 1% year over year to $1.19 billion. The decrease was due to lower service charges and other customer-related fees, and other income and net securities losses, partially offset by rise in net interchange fees.
Non-interest expenses of $4.13 billion were up 9% year over year, mainly owing to 81% jump in marketing costs and 55% surge in professional services costs.
Efficiency ratio was 58.92% compared with 53.89% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.
Loan & Deposit Balances Improve
As of Dec 31, 2018, loans held for investment were $245.9 billion, up 3% from the prior quarter. Also, total deposits, as of the same date, increased 1% sequentially to $249.8 billion.
Credit Quality: A Mixed Bag
Net charge-off rate decreased 22 bps year over year to 2.67%. Also, provision for credit losses declined 15% to $1.64 billion. Likewise, allowance as a percentage of reported loans held for investment was 2.94%, up 1 bp.
However, the 30-plus day performing delinquency rate increased 39 bps year over year to 3.62%.
Profitability & Capital Ratios Improve
Return on average assets was 1.38% at the end of the reported quarter against negative 0.95% in the year-ago quarter. Also, return on average common equity was 10.05%against negative 8.14% in the prior-year quarter.
As of Dec 31, 2018, Tier 1 risk-based capital ratio was 12.7%, up from 11.8% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 11.2% as of Dec 31, 2018, up from 10.3% on Dec 31, 2017.
Share Repurchase Update
During the reported quarter, Capital One repurchased 6.9 million shares for $630 million. This was part of the company’s 2018 capital plan.
Management expects the impact of on boarding of the acquisition of Walmart’s co-branded and private label credit card receivables to be a modest benefit to NCO rate of domestic card business.
In 2019, the company expects to incur nearly $225 million in one-time expenses to launch the new originations programs and integrate the acquired portfolio. These expenses include technology investments and one-time costs related to hiring and training operational staff and managing the surge of activities related to the conversion and launch.
The company expects further increases in average deposit interest rate going forward as product mix shift continues. Also, increasing competition for deposits will also put upward pressure on deposit rates.
The company believes that increasing deposit cost will be a headwind to its net interest margin going forward.
Operating efficiency ratio net of adjustments is expected to improve modestly in 2019 excluding the one-time Walmart launch and integration expenses.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Capital One has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Capital One has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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