Industry Headwinds, Fallout Of Recent Data Breach To Weigh On Capital One’s Stock

Capital One (NYSE:COF) is one of the largest issuer of credit cards in the U.S. with more than $110 billion in outstanding credit card loans at the end of 2018. It provides consumer banking, commercial banking and credit card services to retail consumers, small business & corporates. Its business model faces stiff competition from offerings by peers including: Citigroup, Wells Fargo, U.S Bancorp, JPMorgan, Bank of America etc.

Trefis has analyzed Capital One’s Revenues on an interactive dashboard, along with our forecast for the next three years. While the U.S. banking industry benefited from the Fed’s rate hikes over recent years, we believe that the overall slowdown in consumer activity over recent months will continue over subsequent quarters. This will hurt Capital One more than its larger, more diversified peers because its business model that focuses primarily on credit cards and consumer lending. The recent data breach at Capital One is only going to make things worse for the banking giant over coming years, as it will have to work hard to regain consumer confidence. These factors are expected to negatively impact Capital One’s stock (shows cash and valuation analysis) in the near future.

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Trends in Capital One’s Revenues

• Total revenues increased by 6.7% y-o-y in 2017, before slowing down to 2.7% in 2018. We expect it to increase at an average annual rate of 4.1% over the next three years.
• Revenues are expected to increase from $27.8 billion in 2018 to $31.4 billion by 2021, mainly driven by growth in credit card segment.

[A] Commercial Loan revenues are expected to cross $3.1 billion by 2021

• It offers traditional banking products through an extensive branch network in Connecticut, Louisiana, New Jersey, New York, and Texas.
• Products include commercial loans (for private developers and commercial property investors), middle market loans (for businesses with turnover between $10 million-$250 million), small ticket commercial loans (for mixed-use and multi-family real-estate) and specialty lending (for equipment leasing and other specialized lending).
• Although commercial loans reduced by 2.5% y-o-y in 2018, we expect it to grow at an average annual rate of 2.6% over the next three years.
• Slump in net interest income was the main reason behind negative growth in 2018, which is expected to recover in the subsequent years. This would enable the segment revenues to cross $3.1 billion by 2021.

[B] Consumer loan revenues are expected to drop by 4.6% in 2019

• This segment includes the company’s branch-based lending and deposit gathering activities for small business. Further, it offers automobile lending, mortgage lending and retail loans for auto buyers, home buyers and other retail consumers in the U.S.
• Although the segment revenues jumped by 8.6% y-o-y in 2017, growth rate reduced to 1.2% in 2018 due to lower consumer activity.
• This coupled with expected decrease in interest rates would further reduce it to $6.9 billion by the end of 2019. However, we expect it to grow at an average annual rate of 4.8% over the next two years and cross $7.6 billion by 2021.

[C] Credit Card revenues are expected to cross $20.7 billion by 2021

• The segment includes Capital One’s domestic consumer & small business card lending, national closed end installment lending and international card lending businesses in Canada and the United Kingdom.
• The segment revenues have grown at an average annual rate of 5.1% over the last three years. This growth was mainly driven by increase in outstanding credit card balances, partially offset by slight decrease in net interest yield on credit cards.
• We expect the same trend to continue over the next three years.

Trefis estimates Capital One’s valuation to be $103 per share, which is 20% higher than the current market price after incorporating changes based on Capital One’s earnings release last month.

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