Increased Card Lending, Lower Charge-Off Rates Should Have Boosted Capital One’s Q2 Results

by Trefis Team
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Capital One (NYSE: COF) will report its Q2 2019 earnings on Wednesday, July 18. Consensus figures points to a 3% decline in revenues year-on-year to $7 billion, and a 23% drop in EPS figure to $2.86. Per Trefis, Capital One’s stock has a fair value of $100, which is roughly 10% higher than the current market price. We have analyzed trends in Capital One’s Earnings over recent quarters in an interactive dashboard along with our expectations for full-year 2019. You can modify Trefis forecasts to see the impact of changes on Capital One’s valuation. Additionally, you can see more Trefis data for financial services companies here.

A Quick Look At Capital One’s Sources of Revenue

Capital One reported $28.1 billion in Total Revenues in FY 2018. This included 3 revenue streams:

  • Commercial Loans: $2.9 billion in FY 2018 (10% of Total Revenues) – It includes products like commercial loans, middle market loans, small ticket commercial loans and specialty lending
  • Consumer Loans: $7.2 billion in FY 2018 (26% of Total Revenues) – This segment provides services like branch-based lending, deposit gathering, mortgage lending, automobile lending etc. to retail consumers
  • Credit Cards: $17.7 billion in FY 2018 (63% of Total Revenues) – It includes Capital One’s domestic consumer and small business card lending, domestic national small business lending, national closed end installment lending and international card lending businesses in Canada and the United Kingdom
  • Other: $281 million in FY 2018 (1% of Total Revenues): It includes unallocated amounts related to bank’s centralized Corporate Treasury group activities, such as management of corporate investment portfolio, asset/liability management and certain capital management activities.

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

  • In Q1 2019, Capital One reported Total Revenues of $7.1 billion, which is 2.5% more than the previous year.
  • The increase was primarily driven by an 8% growth in Non-Interest Revenues y-o-y, coupled with a 2% increase in Interest-Earning Assets, although a 7 bps drop in Net Interest Margin (NIM) nullified the effect of a bulk of these gains
  • Operating Expenses increased 3% y-o-y due to jump in Marketing Costs and Professional Services Costs.
  • Notably, credit loss provisions saw a marginal increase of 1% as compared to year-ago period. However, the notable reduction in card charge-off rates over April and May should help loss provisions trend lower in Q2.

Capital One’s Key Revenue & Expense Drivers

Net Interest Margin (NIM): In Q1 2019, Capital One’s net interest margin decreased by 10 bps sequentially. The NIM figure has trended lower for three consecutive quarters, and this has hurt profitability as 82% of the company’s revenues are derived from Net Interest Income.

Interest Earning Assets: Capital One is very sensitive to movement in this driver. In recent quarters, interest-earning assets have seen an upward trend due to an increase in outstanding loans. This trend is expected to continue in subsequent quarters and help the net interest income figure reach $23.6 billion in 2019.

Card Charge-Off Rate: Card Charge-off Rate decreased by 13 bps y-o-y in Q1 due to improvement in economic conditions and low unemployment rates. We expect the same to continue in subsequent quarters.

Capital One’s Outlook For Full Year 2019

  • We expect Capital One to report $28.9 billion in Total Revenues for 2019, which is 3% higher than the figure for last year.
  • Although credit card revenues are expected to grow by 6% y-o-y followed by an uptick in commercial lending, a 2% drop in consumer lending revenues would partially offset gains.
  • Notably, the launch of Walmart Card is expected to boost credit card revenues.
  • Total Expenses would increase by 5% y-o-y to $21.8 billion driven by higher marketing cost and compensation expenses.
  • This would result in a net income figure of $5.7 billion which is 6% less than the figure for the previous year.
  • Capital One has regularly invested in share repurchase and is expected to follow the same trend in 2019. This would help its EPS figure reach $11.43 for FY 2019.
  • The EPS of $11.43 coupled with our P/E multiple of 8.7x works out to a price estimate of $100 – representing a potential upside of 10% for the bank’s stock.

Do not agree with our forecast? Create your own forecast for Capital One Valuation by changing the base inputs (blue dots) on our interactive dashboard.

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