What Does The Decline In Net Interest Margin Over Q1 Mean For Capital One’s Fair Value?

Capital One (NYSE: COF) declared its Q1 2019 earnings late last week and the card-focused bank posted an EPS of $2.87 (outperforming the market EPS estimate of $2.30). As per our Trefis Valuation methodology, Capital One stock is worth $100, which is 15% higher than the current market price. Our price estimate is based on a P/E multiple of 8.7 (based on recent trends) and an earnings estimate of $11.43 for FY 2019.

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 Is Capital One’s Fundamental Value? You can modify any of our key drivers to gauge the impact changes would have on its valuation. In addition, you will find more Trefis data for Financial Services companies here.

See our full analysis of Capital One

Key Insights from Capital One’s Q1 2019 Results

• Capital One’s revenues grew by 2.5% Y-O-Y to $7.08 billion. The increase was primarily driven by growth in Non-Interest Revenues and Interest-Earning Assets, partially offset by a 10 bps drop in Net Interest Margin (NIM).
• Negative trend in NIM can have an adverse impact on its top line as 82% of its revenues are from Net Interest Income.
• Operating Expenses surged by 3% Y-O-Y due to jump in Marketing Costs and Professional Services Costs. However, Marketing Costs fell 38% Q-O-Q due to seasonally elevated marketing costs in the fourth quarter of a year.
• Loss Provisions as % of Net Interest Income is a key expense driver. It saw a mild decrease of 5 bps Y-O-Y and is expected to remain in the same range going forward.
• Card Charge-off Rate decreased by 13 bps Y-O-Y due to improvement in economic conditions and low unemployment rates.

Why Would Revenues Increase In 2019?

• For FY 2019, we expect Capital One’s revenue to grow by 3% on the back of improvement in Non-Interest Fees Revenue and Interest-Earning Assets. Further, the launch of Walmart Card is expected to boost Credit Card revenues.
• Moderate surge in Compensation Fees and Marketing Costs are expected, which will increase Total Operating Expenses by 5%.
• Capital One is a market leader in the Credit Card segment with a strong Interest-Earning Asset base. Further, it has a strong Balance Sheet with substantial cash reserves.
• Higher Tax Rate and increase in operating cost is expected to reduce the Net Income by 6%.
• Capital One has regularly invested in share repurchase and is expected to follow the same trend in 2019, which would lead to an increase in earnings to $11.43 for the year.

In conclusion, Capital One looks positive for the ongoing year, and according to current Trefis estimates the stock is undervalued by around 15%.

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