How Have Capital One’s Revenues Trended, And What Can We Expect For Full-Year 2019?

by Trefis Team
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Capital One (NYSE:COF) is expected to publish its Q1 2019 results on April 25, after the market closes. This note details Trefis’ forecasts for Capital One, as well as some of the key trends we will be watching when the company reports earnings.

We have summarized our full year expectations for Capital One based on the company’s guidance and our own estimates, on our interactive dashboard What Has Driven Capital One’s Revenues & Expenses Over Recent Quarters, And What Can We Expect For Full-Year 2019? You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Financial Services Data here.

How Have Capital One’s Revenues Changed Over Recent Quarters?

  • Capital One reported revenues of $28.1 billion (3.1% increase y-o-y) in 2018
  • Q1 and Q2 2018 saw high growth compared to the previous year, while Q3 and Q4 were largely stagnant
  • We expect revenues to follow a similar trend in Q1 2019

Key Drivers of Revenue 

Key Revenue Driver: Net Interest Margin (NIM)

  • Capital One is very sensitive to changes in its Net Interest Margin, which can have a huge impact on its top line. This is because over 80% of its total revenue comes from Net Interest Income.
  • The company’s NIM declined by 10 basis points in 2018, with Q2 witnessing the highest reduction (22 basis points y-o-y).

How Have Capital One’s Total Expenses Trended?

  • Capital One’s Total Expenses decreased in Q1, Q2 and Q3 of 2018 compared to the previous year, largely due to a decrease in loss provisions.
  • However, the company’s Marketing Expense saw a sharp increase in Q4 2018 which impacted its total expenses. This was largely due to stiff competition by non-card payment services, making it more expensive for Capital One to retain and acquire customers.

Key Expense Components

Key Driver 1: Loss Provision as % of Net Interest Income

  • Capital One’s loss provisions saw a steep decrease of $1.7 billion in 2018 from prior year levels. Further, its loss provisions as a percentage of net interest income fell from 27.7% in 2017 to 20.9% in 2018.
  • Further reductions in loss provisions would have a big impact on the bottom line, as it is a major driver of Total Expenses (28.2% in 2018).

Key Driver 2: Credit Card Charge-Off Rate

  • Capital One saw a decrease in charge-off rates in 2018 compared to 2017. Its card charge-off rate for Q4 2018 was 4.61% –  higher than the 4.15% reported in Q3 2018 due to seasonal trends, but well below the 4.99% level seen in Q4 2017.
  • A further downward trend in card charge-off rates will improve the bottom line by reducing loss provisions.

What Is Capital One’s 2019 Outlook?

  • We expect Capital One to see an increase in total revenue of around 2.4% (to $28.7 billion in 2019), driven by growth in net interest income from larger card and auto balances, and from higher card fees.
  • Net Interest Income is likely to increase by 2% in 2019 on the back of growth in interest-earning assets. However, any pressure on its net interest margin could offset that.
  • A strong economic outlook in the U.S. coupled with low unemployment should help boost Capital One’s bottom line as well.
  • Increases in loan losses, coupled with higher operating expenses, are likely to mitigate the impact of revenue growth. We expect pre-tax earnings to decrease by 1% to $7.25 billion in 2019. A reduction in shares outstanding due to share repurchase efforts should have a positive impact on EPS, but a normalization of effective tax rate in 2019 (the company saw a one-time reduction in taxes in 2018) will have a negative impact. We expect EPS to be just over $11 for full year 2019.
  • Using the EPS forecast of $11 for full year 2019, and a forward P/E multiple of 9 based on recent trends, we estimate the fair value for Capital One’s stock to be $100, which is nearly 15% above the current market price.

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