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Capital One (COF) Q3 Earnings & Revenue Beat, Stock Down 1.1%

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Capital One’s (COF - Free Report) third-quarter 2021 adjusted earnings of $6.86 per share easily surpassed the Zacks Consensus Estimate of $5.22. The bottom line improved 36% from the year-ago quarter.

Results benefited from a solid rise in loan balances, which supported net interest income and margin. Higher consumer confidence aided credit card business and non-interest income. Provision benefit, mainly due to reserve releases, also acted as a tailwind.

However, an increase in operating expenses was a headwind. During the quarter, the company built a legal reserve of $45 million. Perhaps these were the primary reasons for investors’ bearish stance, as the company’s shares lost 1.1% in the afterhours trading.

Net income available to common shareholders (GAAP basis) was $3 billion or $6.78 per share, up from $2.32 billion or $5.06 per share in the prior-year quarter.

Revenues & Expenses Rise, Loan Balance Up

Total net revenues were $7.83 billion, up 6% from the prior-year quarter. The top line also beat the Zacks Consensus Estimate of $7.43 billion.

Net interest income grew 11% from the prior-year quarter to $6.16 billion.

Net interest margin surged 67 basis points (bps) to 6.35%. This was largely driven by lower rates on interest-bearing liabilities, a rise in loan balances, and a fall in average cash balance, partly offset by higher average investment securities balance.

Non-interest income of $1.67 billion declined 8%. This was largely attributable to a substantial fall in net securities gains, partially offset by growth in net interchange fees (up 32%), and service charges and other customer-related fees (up 27%).

Non-interest expenses were $4.19 billion, rising 18%. Adjusted expenses also increased 18% to $4.14 billion.

Efficiency ratio was 53.46%, up from 48.07% in the year-ago quarter. A rise in efficiency ratio indicates deterioration in profitability.

As of Sep 30, 2021, loans held for investment were $261.4 billion, up 5% from the prior quarter. Total deposits, as of the same date, fell marginally to $305.9 billion.

Credit Quality Improves

Provision for credit losses was a benefit of $342 million against a provision of $331 million in the year-ago quarter. This was mainly driven by $770 million of reserve releases.

The 30-plus day performing delinquency rate was stable at 1.97%. Net charge-off rate decreased 105 bps year over year to 0.67%. Allowance, as a percentage of reported loans held for investment, was 4.43%, down 207 bps.

Capital Ratios Improve

As of Sep 30, 2021, Tier 1 risk-based capital ratio was 15.7%, up from 14.8% a year ago. Common equity Tier 1 capital ratio was 13.8% as of Sep 30, 2021, up from 13%.

Share Repurchase Update

During the quarter, Capital One repurchased 16.7 million shares for $$2.7 under its $7.5 billion authorization.

Our View

Capital One’s strategic acquisitions, rise in demand for consumer loans, and steady improvement in the card business position it well for long-term growth. However, mounting expenses remain a major near-term concern.

Currently, Capital One carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance & Earnings Date Other Consumer Loan Providers

Ally Financial’s (ALLY - Free Report) third-quarter 2021 adjusted earnings of $2.16 per share convincingly surpassed the Zacks Consensus Estimate of $1.96. The bottom line showed a rise of 72.8% from the year-ago quarter’s number.

Sallie Mae (SLM - Free Report) , formally known as SLM Corporation, reported third-quarter 2021 core earnings per share of 24 cents, which handily surpassed the Zacks Consensus Estimate of 17 cents. The bottom line compared unfavorably with 45 cents reported in the prior-year quarter.

Credit Acceptance Corporation (CACC - Free Report) is slated to announce quarterly number on Nov 1.

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