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Capital One Financial (COF)

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WHAT HAS CHANGED?

Latest Earnings

In Q1 2019, 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). 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 previous year.

Outlook for FY 2019

We expect Capital One’s revenues to grow by 3% on the back of improvement in Non-Interest Fees Revenue and Interest-Earning Assets. Further, the launch of Walmart Credit Card is likely to boost Card revenues. Correspondingly, Operating Expenses is expected to increase by 5% due to moderate surge in Compensation Fees and Marketing Costs.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Capital One's value that present opportunities for upside or downside to the current Trefis price estimate for the bank:

Credit Cards

  • Provisions % of Outstanding Credit Card Loans: Capital One's credit card provisions increased from 4.7% of the outstanding loan portfolio in 2007 to 8.3% in 2009 before declining to 3% by 2011. Major acquisitions pushed this figure to 5.1% for 2012 before Capital One's decision to run-off and sell some of the loan portfolios helped provisions to fall to below 3.5% in 2014 before jumping to 5.9% by 2017. In FY 2018, it reported provisions of 4.5% which we estimate to normalize at around 5% over our forecast period, should the division perform worse than expected in coming years, the provisions could increase to 6%. If that were to occur, there would be a downside of 16% to the Trefis price estimate. On the other hand, if the bank focuses on improving credit quality of its loan portfolio, and the provisions reduce to 4% of the loans over the same period, then this would represent a 16% upside to the Trefis price estimate.
  • Net Interest Yield on Credit Card Balances: Capital One's net interest yield on its credit card portfolio has remained around 13% over recent years, and we forecast it to remain at that level over the rest of the forecast period. However, if the yield figure falls to 12% for this period, then there would be a downside of about 8% to the current price estimate.

BUSINESS SUMMARY

Capital One is one of the largest banks in the United States, whose banking and non-banking subsidiaries market a variety of financial products and services. The corporation's principal subsidiaries include Capital One Bank (USA) and National Association (COBNA) which currently offer credit and debit card products, other lending products, and deposit products; and Capital One, National Association (CONA) which offer a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

Big-Ticket Acquisitions

In June 2011, Capital One bought the American banking operations of ING Direct for $9 billion which significantly boosted Capital One's consumer and commercial loans portfolio.

Capital One also agreed to buy the United States credit card business of HSBC Holdings for $2.6 billion which boosted Capital One's credit card loans by more than $30 billion. The company is also expected to realize cost saving of about $350 million from the business combination.

In late 2015, Capital One acquired GE's healthcare financing unit - adding $8.5 billion in healthcare loans to its total portfolio.

SOURCES OF VALUE

The Credit Cards division is the main source of value for Capital One for the following reasons

Largest revenue contributor

Capital One's Credit Card division accounted for 64% of the firm's total revenues in 2018 compared to 26% from the Consumer Loans division and 10% from the Commercial Loans division.

KEY TRENDS

Rise in Prime Loan Interest Rates Will Benefit Capital One

As a result of the economic downturn, the U.S. government decreased the prime loan interest rate (the interest rate that commercial banks charge their most credit-worthy customers) from levels of around 8.25% in late 2007 to 3.25% in 2008. The prime rate remained at this level for more than 7 years, before a series of rate hikes by the Fed brought this figure to its current level of 5.50%. As economic conditions improve, interest rates will eventually return to historical levels, at which point Capital One's revenues will be positively impacted.

Fast Growth in Electronic, Cashless Payment Solutions

Capital One also operates in the cashless payment solution market. This includes payments using credit cards. The market for such transactions is growing at a rapid pace. Consumers are moving toward cashless transactions in large numbers, particularly in international markets where credit and debit cards are becoming more prevalent. We expect significant growth in this segment in the near future as more customers and merchants embrace credit / debit card payment solutions.

Recent Trefis Articles

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Capital One’s Conservative 2019 Capital Plan Hints At More Acquisitions To Come In The Near Future

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

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Should Investors Be Worried About Capital One’s Private Label Card Losses?

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Capital One’s Decision To Get Rid Of Its Remaining Mortgage Portfolio Is Good News For Investors

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What’s Behind The Recent Fall In Capital One’s Share Price?

Earlier this week Capital One (NYSE:COF) reported a much better-than-expected EPS figure for the first quarter of the year. However, investors were unhappy with the card-focused bank's performance for the quarter, as they led its shares 5% lower on the next trading d... ...More



Gauging Capital One’s Sensitivity To The Fed’s Planned Rate Hikes

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Why Investor Concerns About Capital One’s Elevated Card Charge-Off Rates Are Justified

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Capital One Forced To Reduce Share Repurchases Due To One-Time $1.9 Billion Charge From The Tax Act

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