Capital One Is Good For $62 Despite Disappointing Earnings

Capital One Financial (NYSE:COF) came out with a rather poor performance for the last quarter of 2012, with deteriorating credit conditions taking a toll on the banking group’s income for the period. ^[1] Capital One reported that it was setting aside another $1.15 billion as provisions to cover losses on its loan portfolio, making the total provisions for the year $4.42 billion – almost double the $2.36 billion in provisions for 2011. No doubt the figure for 2012 is inflated by Capital One’s acquisitions of HSBC’s U.S. card business in late 2011, something the bank had already warned against a while ago (see Capital One Reports Profitable Quarter; Warns Of Higher Future Charge-Offs). Nevertheless, the lower-than-expected result stemming from a quarter-on-quarter decline in revenue coupled with the bank’s admission that 2013 figures would be follow a similar tune led investors to discard the bank’s shares. Capital One’s shares lost 7.5% of their value over trading last Friday.

We maintain a $62 price estimate for Capital One’s stock, which is at a premium of less than 10% to the current market price.

See our full analysis for Capital One

Credit Card Provisions Will Decline From Current Highs Over Coming Years

A higher charge-off rate was an expected outcome of Capital One’s acquisition of HSBC U.S. card business because credit card loans by the erstwhile HSBC unit were not given out on similar stringent terms that Capital One employs. This was the trade-off in the deal – while the acquisition boosted the credit card portfolio and also brought in cost synergies, the overall charge-off rate on loans (and hence the corresponding provisions) will remain higher than their historical pre-recessionary levels.

But the positive credit outlook for the country is good news for Capital One. Despite the fact that the bank has had increasing loan charge-off rates over recent months, a recent report from the American Bankers Association (ABA) points towards an improvement in these figures in the months to come (see Card Delinquencies Hit 18-Yr Low In Q3: Good News Or Bad News For Banks?).

Credit Card Loans Continue Growth Trajectory

Capital One reported a marked increase in the number of outstanding credit card loans at the end of 2012, with the card portfolio swelling from $89 billion at the end of Q3 2012 to $92 billion at the end of Q4 2012 – an annualized growth rate of nearly 13%. And as the economy recovers and consumer spending increases, the card loans portfolio will also continue to grow.

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1. Capital One Reports Fourth Quarter 2012 Net Income of $843 million, or $1.41 per share, Capital One Press Releases, Jan 17 2013 [↩]