A month has gone by since the last earnings report for Capital One (COF). Shares have added about 8.9% 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 Q3 Earnings and Revenues Beat, Costs Decline Y/Y
Capital One’s third-quarter 2020 adjusted earnings of $5.05 per share easily outpaced the Zacks Consensus Estimate of $1.99. Also, the figure was 52% above the year-ago quarter level.
The results reflect an improvement in non-interest income and lower expenses. Further, credit costs declined mainly due to reserve releases during the quarter. However, decline in loan balance and lower interest rates were headwinds.
After taking into consideration non-recurring items, net income available to common shareholders was $2.32 billion or $5.06 per share, up from $1.27 billion or $2.69 per share in the prior-year quarter.
Revenues Improve, Expenses Down
Total adjusted net revenues were $7.35 billion, up 3% from the prior-year quarter. The figure also beat the Zacks Consensus Estimate of $6.71 billion.
NII fell 3% from the prior-year quarter to $5.56 billion. NIM also declined 105 basis points (bps) to 5.68% due to lower yields on interest-earning assets.
Non-interest income of $1.83 billion jumped 49% from the prior-year quarter.
Non-interest expenses were $3.55 billion, down 8% from the year-ago number. Rise in other costs, and salaries and associate benefit expenses were more than offset by fall in marketing costs and amortization of intangibles.
Efficiency ratio was 48.07%, down from 55.64% in the year-ago quarter. A fall in efficiency ratio indicates improvement in profitability.
As of Sep 30, 2020, loans held for investment were $248.2 billion, down 1% from the prior quarter. Total deposits, as of the same date, were on par sequentially at $305.7 billion.
Credit Quality: Mixed Bag
Provision for credit losses plunged 76% on a year-over-year basis to $331 million. The fall was largely due to $742 million reserve release. Further, the 30-plus day performing delinquency rate declined 131 bps to 1.97%.
However, allowance, as a percentage of reported loans held for investment was 6.50%, up 368 bps. Also, net charge-off rate decreased 10 bps year over year to 2.38%.
Capital Ratios Improve
As of Sep 30, 2020, Tier 1 risk-based capital ratio was 14.8%, up from 14.4% a year ago. Further, common equity Tier 1 capital ratio was 13% as of Sep 30, 2020, up from 12.5% as of Sep 30, 2019.
The company expects to redeem its outstanding preferred stock Series F in the fourth quarter of 2020. This will result in a one-time charge, which will likely reduce net income available to common shareholders by $17 million in the quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 47.51% due to these changes.
Currently, Capital One has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. 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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