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Rate Hikes, Card Business Aid Capital One (COF) Amid Cost Woes
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Capital One’s (COF - Free Report) solid card and online banking businesses, strategic acquisitions, and raised demand for consumer loans are anticipated to keep supporting financials in the quarters ahead. Rising interest rates will aid top-line growth.
However, mounting expenses and deteriorating asset quality make us apprehensive about the company’s growth prospects.
Analysts also have a neutral stance toward the COF stock. The Zacks Consensus Estimate for the company’s current-year earnings has been unchanged over the past 30 days. Thus, Capital One currently carries a Zacks Rank #3 (Hold).
Over the past year, shares of COF have lost 38.3% compared with the industry’s decline of 32.9%.
Image Source: Zacks Investment Research
Looking at its fundamentals, Capital One’s revenues witnessed a five-year (2017-2021) compound annual growth rate (CAGR) of 2.8%, with the momentum continuing in the first nine months of 2022. Opportunistic buyouts over the years have been driving revenues.
In 2021, COF acquired TripleTree, LLC, which is expected to enhance its investment banking capabilities. In 2019, it acquired KippsDeSanto and, thus, forayed into the merger and acquisitions (M&As) market. The acquisitions of Beech Street Capital and GE's healthcare unit reflect Capital One’s revenue-diversifying efforts. Revenue prospects look encouraging on the back of the company’s solid credit card and online banking businesses, as well as decent loan demand. We expect total revenues to grow 10.9%, 1.9% and 3.7% for 2022, 2023 and 2024, respectively.
Moreover, with the Federal Reserve raising interest rates, Capital One’s net interest income (NII) and net interest margin (NIM) are expected to witness improvements. Supported by solid consumer loan growth and higher rates, the company’s NII and NIM witnessed improvement in 2021 and the first nine months of 2022. Our estimates for NII reflect a CAGR of 5.5% by 2024. Further, we project NIM of 6.66%, 6.60% and 6.65% for 2022, 2023 and 2024, respectively.
Apart from this, COF’s capital-deployment initiatives look encouraging. After slashing the quarterly dividend by 75% in 2020, Capital One restored the same to 40 cents per share in the first quarter of 2021. In July 2021, the company hiked the same by 50% to 60 cents per share and announced a special dividend of 60 cents per share. The company has a share repurchase plan in place. As of Sep 30, 2022, $5.3 billion worth of repurchase authorization was available.
However, Capital One’s asset quality has been deteriorating. The provision for credit losses and net charge-offs (NCOs) have been steadily rising. Though provisions fell in 2018 and NCOs declined in 2018 and 2020, these witnessed a CAGR of 12.3% and 0.8%, respectively, over the five years ended 2020. In 2021, the company recorded a provision benefit and a decline in NCOs, reflecting an improving economic outlook. Nonetheless, provisions and NCOs rose in the first nine months of 2022 on worsening economic expectations.
COF’s expenses witnessed a CAGR of 3.9% over the last five years (ended 2021), with the trend persisting in the first nine months of 2022. The increase was mainly due to a rise in marketing costs and inflationary pressure. Expense levels are expected to remain elevated, given the company’s continued investments in technology and infrastructure, as well as inorganic expansion efforts. Our estimates for total non-interest expenses suggest seeing a CAGR of 13.4% over the next three years.
The consensus estimate for S&T Bancorp’s current-year earnings has been revised 2.1% upward over the past 60 days. Over the past three months, STBA’s share price has increased 17%.
Mid Penn Bancorp’s current-year earnings estimates have been revised 7.7% upward over the past 60 days. MPB’s shares have gained 5.1% over the past three months.
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Rate Hikes, Card Business Aid Capital One (COF) Amid Cost Woes
Capital One’s (COF - Free Report) solid card and online banking businesses, strategic acquisitions, and raised demand for consumer loans are anticipated to keep supporting financials in the quarters ahead. Rising interest rates will aid top-line growth.
However, mounting expenses and deteriorating asset quality make us apprehensive about the company’s growth prospects.
Analysts also have a neutral stance toward the COF stock. The Zacks Consensus Estimate for the company’s current-year earnings has been unchanged over the past 30 days. Thus, Capital One currently carries a Zacks Rank #3 (Hold).
Over the past year, shares of COF have lost 38.3% compared with the industry’s decline of 32.9%.
Image Source: Zacks Investment Research
Looking at its fundamentals, Capital One’s revenues witnessed a five-year (2017-2021) compound annual growth rate (CAGR) of 2.8%, with the momentum continuing in the first nine months of 2022. Opportunistic buyouts over the years have been driving revenues.
In 2021, COF acquired TripleTree, LLC, which is expected to enhance its investment banking capabilities. In 2019, it acquired KippsDeSanto and, thus, forayed into the merger and acquisitions (M&As) market. The acquisitions of Beech Street Capital and GE's healthcare unit reflect Capital One’s revenue-diversifying efforts. Revenue prospects look encouraging on the back of the company’s solid credit card and online banking businesses, as well as decent loan demand. We expect total revenues to grow 10.9%, 1.9% and 3.7% for 2022, 2023 and 2024, respectively.
Moreover, with the Federal Reserve raising interest rates, Capital One’s net interest income (NII) and net interest margin (NIM) are expected to witness improvements. Supported by solid consumer loan growth and higher rates, the company’s NII and NIM witnessed improvement in 2021 and the first nine months of 2022. Our estimates for NII reflect a CAGR of 5.5% by 2024. Further, we project NIM of 6.66%, 6.60% and 6.65% for 2022, 2023 and 2024, respectively.
Apart from this, COF’s capital-deployment initiatives look encouraging. After slashing the quarterly dividend by 75% in 2020, Capital One restored the same to 40 cents per share in the first quarter of 2021. In July 2021, the company hiked the same by 50% to 60 cents per share and announced a special dividend of 60 cents per share. The company has a share repurchase plan in place. As of Sep 30, 2022, $5.3 billion worth of repurchase authorization was available.
However, Capital One’s asset quality has been deteriorating. The provision for credit losses and net charge-offs (NCOs) have been steadily rising. Though provisions fell in 2018 and NCOs declined in 2018 and 2020, these witnessed a CAGR of 12.3% and 0.8%, respectively, over the five years ended 2020. In 2021, the company recorded a provision benefit and a decline in NCOs, reflecting an improving economic outlook. Nonetheless, provisions and NCOs rose in the first nine months of 2022 on worsening economic expectations.
COF’s expenses witnessed a CAGR of 3.9% over the last five years (ended 2021), with the trend persisting in the first nine months of 2022. The increase was mainly due to a rise in marketing costs and inflationary pressure. Expense levels are expected to remain elevated, given the company’s continued investments in technology and infrastructure, as well as inorganic expansion efforts. Our estimates for total non-interest expenses suggest seeing a CAGR of 13.4% over the next three years.
Stocks to Consider
A couple of better-ranked stocks from the finance space are S&T Bancorp (STBA - Free Report) and Mid Penn Bancorp (MPB - Free Report) . STBA currently carries a Zacks Rank #2 (Buy) and MPB sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for S&T Bancorp’s current-year earnings has been revised 2.1% upward over the past 60 days. Over the past three months, STBA’s share price has increased 17%.
Mid Penn Bancorp’s current-year earnings estimates have been revised 7.7% upward over the past 60 days. MPB’s shares have gained 5.1% over the past three months.