What To Expect From Capital One Stock in Q3?

by Trefis Team
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Capital One (NYSE: COF) is scheduled to report its fiscal Q3 2021 results on Tuesday, October 26. We expect Capital One to report mixed results, with revenues topping the estimates and earnings falling short of the mark. The credit card giant posted revenues of $7.4 billion in the last quarter, which was 12% more than the year-ago period. It was driven by a 49% y-o-y jump in non-interest revenues due to higher domestic card purchase volume, followed by a 5% increase in net interest income (NII). Further, the adjusted net income improved from -$1 billion to $3.45 billion in Q2, mainly driven by a favorable decrease in provisions for credit losses and lower non-interest expenses as a % of revenues. We expect the same trend to continue in the third quarter.

Our forecast indicates that Capital One’s valuation is $182 per share, which is 10% above the current market price of close to $166. Our interactive dashboard analysis on Capital One’s Earnings Preview has more details. 

(1) Revenues expected to be just ahead of the consensus estimates

Capital One’s revenues for full-year 2020 were $28.5 billion – marginally below the year-ago period. This was due to a 2% y-o-y drop in the NII, partially offset by a 7% gain in the non-interest revenues.

  • COF generates more than 80% of the total revenues from NII. Hence, changes in interest rates have a direct impact on the top-line. The same happened in 2020, as the NII suffered due to interest rate headwinds, partially offset by higher outstanding loans in the commercial and consumer loan segments. The same trend continued in the first quarter of 2021. That said, the NII improved in the second quarter driven by lower interest rates paid on interest-bearing deposits and higher average outstanding balances in the auto loan portfolio. However, the interest rates paid on interest-earning assets were still below the pre-Covid-19 levels. We expect the same momentum to continue in the third quarter as well.
  • The company reported $5.6 billion in non-interest revenues in 2020 – up 7% y-o-y. This was mainly due to an unrealized valuation gain of $535 million, excluding which the non-interest revenues were actually lower than the 2019 figure. It was mainly due to lower domestic card purchase volume. However, the pattern changed in the first and second quarters of 2021, with COF posting 5% and 49% y-o-y growth. This was driven by a recovery in consumer spending levels, which benefited the card purchase volumes. We expect the third-quarter results to be on similar lines.
  • Overall, we expect Capital One’s revenues to touch $29.4 billion for FY2021.

Trefis estimates Capital One’s fiscal Q3 2021 revenues to be around $7.51 billion, slightly above the $7.44 billion consensus estimate. We expect the lower interest expense and growth in non-interest revenues to drive the third-quarter results.

Moving forward, we expect the purchase volumes and outstanding loans to increase with improvement in the economy. However, the NII is likely to see stagnant growth in FY2021, as low-interest rates are likely to stay for some more time. Our dashboard on Capital One’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.

2) EPS is likely to miss the consensus estimates

Capital One Q3 2021 adjusted earnings per share (EPS) is expected to be $5.16 per Trefis analysis, almost 4% below the consensus estimate of $5.38. The company’s adjusted net income decreased 54% y-o-y to $2.4 billion in 2020 due to a sizable build-up in provisions for credit losses – provisions increased 65% y-o-y to $10.3 billion. That said, its profitability numbers jumped in the first and second quarters of 2021, as the firm decreased its provisions for credit losses due to some recovery in the credit repayment capability of its customers. Notably, the provision figure reduced from $4.25 billion to -$1.16 billion in Q2. Further, the non-interest expenses as a % of revenues decreased from 58% to 54% in the quarter. We expect the same trend to drive the third-quarter results.

Going forward, we expect Capital One’s net income margin to improve in FY2021, leading to an adjusted net income of $10.8 billion – an increase of 3.5x y-o-y. This will likely result in an EPS of $24.63.  

(3) Stock price estimate 10% higher than the current market price

We arrive at Capital One’s valuation, using an EPS estimate of $24.63 and a P/E multiple of just above 7x in fiscal 2021. This translates into a price of $182, which is 10% above the current market price of around $166. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

 

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