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Investment Overview for Capital One (NYSE:COF)

WHAT HAS CHANGED?

Latest Earnings

In Q3 2019, Capital One’s revenues of $6.96 billion was at the same level as the previous year. This could be attributed to 4% y-o-y growth in Non-Interest Revenues, offset by 1% drop in Net Interest Income driven by 28 bps drop in net interest margin on a year-on-year basis. Further, Operating Expenses surged by 3% y-o-y due to jump in salaries & associated benefits followed by a 9% jump in provisions for credit losses.

Outlook for FY 2019

In 2019, we expect Total Revenues to be $28.2 billion, or 2% more than the level in 2018. Credit Card division is expected to report a 3% jump in revenues followed by 1% increase in consumer loans, partially offset by 2% drop in commercial loans segment.

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Below are key drivers of Capital One's value that present opportunities for upside or downside to the current Trefis price estimate for the bank:

Credit Cards

• Provisions % of Outstanding Credit Card Loans: Capital One's credit card provisions increased from 4.7% of the outstanding loan portfolio in 2007 to 8.3% in 2009 before declining to 3% by 2011. Major acquisitions pushed this figure to 5.1% for 2012 before Capital One's decision to run-off and sell some of the loan portfolios helped provisions to fall to below 3.5% in 2014 before jumping to 5.9% by 2017. In FY 2018, it reported provisions of 4.5% which we estimate to normalize at around 5% over our forecast period, should the division perform worse than expected in coming years, the provisions could increase to 6%. If that were to occur, there would be a downside of 16% to the Trefis price estimate. On the other hand, if the bank focuses on improving credit quality of its loan portfolio, and the provisions reduce to 4% of the loans over the same period, then this would represent a 16% upside to the Trefis price estimate.
• Net Interest Yield on Credit Card Balances: Capital One's net interest yield on its credit card portfolio has remained around 13% over recent years, and we forecast it to remain at that level over the rest of the forecast period. However, if the yield figure falls to 12% for this period, then there would be a downside of about 8% to the current price estimate.

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Capital One is one of the largest banks in the United States, whose banking and non-banking subsidiaries market a variety of financial products and services. The corporation's principal subsidiaries include Capital One Bank (USA) and National Association (COBNA) which currently offer credit and debit card products, other lending products, and deposit products; and Capital One, National Association (CONA) which offer a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

Big-Ticket Acquisitions

In June 2011, Capital One bought the American banking operations of ING Direct for $9 billion which significantly boosted Capital One's consumer and commercial loans portfolio.

Capital One also agreed to buy the United States credit card business of HSBC Holdings for $2.6 billion which boosted Capital One's credit card loans by more than $30 billion. The company is also expected to realize cost saving of about $350 million from the business combination.

In late 2015, Capital One acquired GE's healthcare financing unit - adding $8.5 billion in healthcare loans to its total portfolio.

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The Credit Cards division is the main source of value for Capital One for the following reasons

Largest revenue contributor

Capital One's Credit Card division accounted for 64% of the firm's total revenues in 2018 compared to 26% from the Consumer Loans division and 10% from the Commercial Loans division.

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Rise in Prime Loan Interest Rates Will Benefit Capital One

As a result of the economic downturn, the U.S. government decreased the prime loan interest rate (the interest rate that commercial banks charge their most credit-worthy customers) from levels of around 8.25% in late 2007 to 3.25% in 2008. The prime rate remained at this level for more than 7 years, before a series of rate hikes by the Fed brought this figure to its current level of 5.50%. As economic conditions improve, interest rates will eventually return to historical levels, at which point Capital One's revenues will be positively impacted.

Fast Growth in Electronic, Cashless Payment Solutions

Capital One also operates in the cashless payment solution market. This includes payments using credit cards. The market for such transactions is growing at a rapid pace. Consumers are moving toward cashless transactions in large numbers, particularly in international markets where credit and debit cards are becoming more prevalent. We expect significant growth in this segment in the near future as more customers and merchants embrace credit / debit card payment solutions.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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