Capital One (NYSE:COF) is set to report its fourth quarter and financial year 2011 earnings on January 19, 2012. Last quarter, the company delivered earnings of $813 million compared to $911 in the quarter before that. Its loan balance grew by $1 billion to $130 billion driven by growth in the Auto Finance and Commercial businesses. We expect loan growth to continue in the fourth quarter as well driven by rising consumer spending and improving consumer sentiments. We also expect Capital One to report stabilizing credit default rates after almost 2 years of rapidly declining charge-offs and delinquencies. Capital One is the fifth largest bank in the U.S. and competes with American Express (NYSE:AXP), Discover Financial (NYSE:DFS), Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM).
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Net Interest Yield to Remain Strong
We expect Capital One’s net interest yield on credit card loans to remain strong in 2011 driven by improvements in the quality of loans. Stricter lending requirements mean fewer bad loans and lower default rates which result in higher interest margin.
In the first nine months of 2011, Capital One released $1.1 billion in loan allowances because of the reduction in default rates and this will boost Capital One’s net interest yield in 2011. Also the decline in deposit rates has led to a reduction in the cost of funds, further increasing the interest yield for Capital One.
Purchase Volume to Grow
We expect Capital One’s purchase volume to register double digit growth in the fourth quarter of 2011. In the third quarter, the purchase volume grew by 17%, outpacing the growth in the industry. New account origination continues to be strong for Capital One driven the company’s new products and new partnerships.
We have a $48 price estimate for Capital One, which is about the same as its current stock price.
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