How Could The Recent Data Breach Affect Capital One’s Stock?

by Trefis Team
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Capital One
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Capital One (NYSE: COF) is one of the largest banks in the United States, whose banking and non-banking subsidiaries offer credit & debit cards, commercial lending and consumer lending products & services to retail consumers, small businesses and commercial clients. The bank reported a data breach in July 2019, in which a hacker gained access to 106 million credit card applications and customer accounts. While the actual impact on Capital One customers is yet to be analyzed, it has exposed the bank to significant legal cost. Notably, Capital One’s stock has fallen from around the $100-mark before the breach was announced to roughly $85 now.

Trefis has quantified the impact of Capital One’s data breach on key operating metrics including its revenues, expenses as well as stock price in an interactive dashboard. The bank expects the incident to cost somewhere between $100-150 million in 2019, which would include customer notification, credit monitoring, tech cost and legal support. But the incident has also exposed the bank to several class-action lawsuits and regulatory fines – which are expected to cost well above the bank’s estimated 2019 outlay. You can make changes to our forecast for individual revenue streams, cost associated with the data breach as well as potential payments to the bank from insurance claims in the dashboard to arrive at your own forecast for Capital One’s stock. Additionally, you can see more Trefis data for financial companies here.

What is the impact of recent data breach on Capital One’s Revenues, Expenses & EPS over the next three years?

Impact on Capital One’s Revenues

  • As a direct result of this incident, customer confidence in Capital One is likely to remain low over subsequent quarters
  • This is expected to reduce Capital One’s revenues by 3% in 2019, 2020 and 2021 with respect to our estimates under the base case scenario (before the data breach) – implying a reduction in our forecast for Total Revenues in 2019 from $28.7 billion to $27.9 billion.
  • Similarly, total revenues in 2020 would reduce from $29.9 billion to $29.1 billion, while the 2021 figure would drop from $31.4 billion to $30.4 billion.

Cost associated with the incident would impact the total expense figure over the next three years.

  • We expect Capital One to incur an additional cost of $150 million in 2019 and 2020, followed by $200 million in 2021 due to the incident.
  • While Capital One has a cyber-security insurance policy in place, we don’t think this policy will yield any payments for Capital One over the next three years.
  • This implies that the total expense figure would increase in:
    • 2019 from $21.5 billion to $21.7 billion
    • 2020 from $22.6 billion to $22.7 billion
    • 2021 from $23.6 billion to $23.8 billion

Higher Total Expense would reduce the EBT figure over the next three years

As compared to the base model, Capital One’s EBT figure would reduce in:

  • 2019 from $7.1 billion to $6.2 billion
  • 2020 from $7.4 billion to $6.4 billion
  • 2021 from $7.8 billion to $6.5 billion

How would it affect the Net Income?

  • Compared to the base model, Net Income from continuing operations would decrease by 14% in 2019 & 2020, and 17% in 2021
  • In the new scenario, Capital One is expected to report a net income of $4.9 billion in 2019, followed by $6.4 billion & $6.5 billion in 2020 and 2021 respectively.

This would have an adverse effect on EPS figure, which is expected to reduce by roughly 15% for each year vs. our base case forecast

As compared to the base model, EPS would decrease in:

  • 2019 from $11.34 to $9.79
  • 2020 from $15.46 to $13.23
  • 2021 from $16.83 to $14.11

Impact on Capital One’s Valuation

  • Drop in EPS figure coupled with a slight reduction in the P/E multiple (due to weaker short-term growth) would decrease Capital One’s fair value.
  • As compared to the base model, Capital One’s valuation would decrease from $103 to $88 in 2019 (P/E multiple would slightly drop from 9.1x to 9.0x)
  • Notably, the estimated stock price under the Data Breach scenario is roughly around the current market price for Capital One’s stock.

Trefis estimates Capital One’s stock (shows cash and valuation analysis) to have a fair value of $103 under the base case scenario, which is 15% higher than the current market price. Our base-case price estimate incorporates changes to our forecast based on Capital One’s earnings release last month. We are in the process of updating our price estimate to factor in the potential impact of the data breach.

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