It has been about a month since the last earnings report for Capital One Financial Corporation (NYSE:COF) . Shares have lost about 2.6% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? 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 drivers.
Capital One Q3 Earnings Beat, Revenues & Costs Rise
Capital One third-quarter 2017 adjusted earnings of $2.42 per share handily outpaced the Zacks Consensus Estimate of $2.15. Also, it compared favorably with the year-ago quarter’s earnings of $2.03.
Results benefited from higher revenues and easing margin pressure. Also, the quarter witnessed a rise in loan balance. However, increase in provisions and expenses acted as headwinds.
After taking into consideration charges related the Cabela’s acquisition, net income for the quarter came in at $1.11 billion or $2.14 per share. This was up from $1 billion or $1.90 per share recorded in the prior-year quarter.
Revenues Growth Supports Results
Net revenues were $6.99 billion, up 8% year over year. Also, the figure topped the Zacks Consensus Estimate of $6.83 billion.
Net interest income grew 8% from the prior-year quarter to $5.70 billion. Also, net interest margin increased 29 basis points (bps) year over year to 7.08%.
Non-interest income increased 9% year over year to $1.29 billion. The increase was largely driven by a rise in net interchange fees, partially offset by a decline in other income, and service charges and other customer-related fees.
Non-interest expenses of $3.57 billion rose 6% from the year-ago quarter. All cost components, except amortization of intangibles, occupancy and equipment, and marketing, rose year over year.
Efficiency ratio came in at 51.07% compared with 52.02% in the year-ago quarter. A decrease in efficiency ratio indicates improved profitability.
Strong Balance Sheet
As of Sep 30, 2017, loans held for investment were $252.4 billion, up 3% from the prior quarter. Total deposits, as of the same date, remained relatively stable sequentially at $239.06 billion.
Total stockholder’s equity was $50.15 billion as of Sep 30, 2017, a rise of 2% from the previous quarter.
Credit Quality Worsens
Net charge-off rate jumped 51 bps year over year to 2.61%. Further, provision for credit losses rose 15% from the year-ago quarter to $1.83 billion.
Also, the 30-plus day performing delinquency rate increased 22 bps year over year to 2.93%. Likewise, allowance, as a percentage of reported loans held for investment was 2.94%, up 31 bps year over year.
Strong Profitability & Capital Ratios
Return on average assets was 1.28% at the end of the reported quarter, up from 1.18% in the year-ago quarter. Also, return on average common equity increased to 9.40% from 8.59% in the prior-year quarter.
As of Sep 30, 2017, Tier 1 risk-based capital ratio was 12.2%, up from 12% in the prior-year quarter. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.7% as of Jun 30, 2017, up from 10.6% as of Sep 30, 2016.
Outlook
Considering the growth in the last two years, management remains confident about delivering EPS growth (excluding adjusting items) in the range of 7–11% for 2017. This includes as well as excludes the impact of the Cabela’s transaction.
For 2017, domestic credit card charge-off rate is expected in the high 4–5% range, with quarterly variability. Also, credit pressure is expected to continue in oil field service and taxi medallion lending portfolios.
Notably, the company expects the Cabela’s deal to reduce domestic card revenue margin by 65 bps starting in fourth-quarter 2017. Further, beginning in December, the deal is projected to lead to reduction in the domestic card charge-off rate by 25 bps.
The company expects the impact of growth math to moderate in 2017 and gradually decrease in 2018. This means the year-over-year increase in delinquencies and charge-off rates are expected to decline gradually, as new loan balances in the front book season become a larger proportion of the overall portfolio relative to the older and highly seasoned back book.
In 2017, management projects efficiency ratio (excluding adjusting items) in the 51% plus or minus a reasonable margin of volatility. In the long term, management remains optimistic about deriving efficiency improvement driven by growth and digital productivity gains.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to three lower.
VGM Scores
At this time, the stock has an average Growth Score of C, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.
Outlook
While estimates have been moving upward, the magnitude of the revision is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
Capital One Financial Corporation (COF): Free Stock Analysis Report
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