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Capital One (COF) Aided by Credit Card Business Amid Cost Woes

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Capital One’s (COF - Free Report) solid card and online banking businesses and strategic acquisitions are anticipated to keep supporting financials in the quarters ahead. Robust demand for consumer loans and higher interest rates are likely to aid top-line growth.

However, mounting expenses and deteriorating asset quality make us apprehensive about the company’s growth prospects.

Analysts are also not very optimistic regarding the company’s earnings growth prospects. The Zacks Consensus Estimate for its current-year earnings has been revised 12.8% lower over the past 30 days. Capital One currently carries a Zacks Rank #3 (Hold).

Over the past year, shares of COF have lost 20.1% compared with the industry’s decline of 15.6%.

Zacks Investment Research
Image Source: Zacks Investment Research

Looking at its fundamentals, while the company’s revenues declined marginally in 2020, the same witnessed a five-year (2017-2022) compound annual growth rate (CAGR) of 4.7%. The uptrend continued in the first quarter of 2023. Opportunistic buyouts over the years have been driving revenues.

In 2021, COF acquired TripleTree, LLC, which will further enhance its investment banking capabilities. In 2019, it acquired KippsDeSanto and thus, forayed into the merger and acquisitions market. Also, 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 3.1%, 2.5% and 7.3% in 2023, 2024 and 2025, respectively.

After slashing rates thrice in 2019, the central bank cut interest rates to near zero in March 2020 (to cushion the U.S. economy from the coronavirus-induced mayhem), which hurt COF’s net interest income (NII) and net interest margin (NIM). Nevertheless, with the Federal Reserve expected to keep interest rates high in the near term (although the pace of the rate hikes will slow down), NII and NIM are likely to witness continued improvements. Our estimates for NII reflect a CAGR of 4.2% by 2025.

COF’s capital-deployment initiatives look encouraging. After slashing the quarterly dividend by 75% in 2020 based on the Federal Reserve’s requirements, Capital One restored the same to 40 cents per share in 2021. In July 2021, it hiked the same by 50% to 60 cents per share.

The company also has a share repurchase plan in place. Based on its earnings strength and solid liquidity position, Capital One’s enhanced capital deployment plans look sustainable.

However, the company’s asset quality has been deteriorating. Provision for credit losses and net charge-offs (NCOs) have been steadily rising. Though provisions fell in 2018 and were a benefit in 2021, these increased in the rest of the years till 2022. Similarly, NCOs declined in 2018, 2020 and 2021, while witnessing a jump in 2019 and 2022.

Both provisions and NCOs increased in the first quarter of 2023. The company’s credit quality is likely to remain under pressure in the near term, given the rising loan balance and deteriorating macroeconomic outlook.

Capital One’s expenses witnessed a CAGR of 6.2% for the last five years (ended 2022). The increase was mainly due to a rise in marketing costs and inflationary pressure. The upward trend in costs continued in the first quarter of 2023.

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 a CAGR of 7.8% by 2025.

Stocks to Consider

A couple of better-ranked stocks from the finance space are Pathward Financial, Inc. (CASH - Free Report) and First Citizens BancShares (FCNCA - Free Report) .

The Zacks Consensus Estimate for Pathward Financial’s current fiscal year’s earnings has been revised 1.8% upward over the past 60 days. The company’s shares have gained 12.1% in the past year. Currently, CASH carries a Zacks Rank #2 (Buy).

First Citizens BancShares currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised 67.2% upward over the past 60 days. In the past year, FCNCA’s shares have rallied 89.5 %. You can see the complete list of today’s Zacks #1 Rank stocks here.

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