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Capital One Rides on Strong Credit Card Business Despite Cost Woes
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Key Takeaways
COF's Discover acquisition and credit card growth fuel top-line expansion into 2027.
Total revenues and NIM are projected to rise, supported by strong loan demand and high interest rates.
Elevated expenses and deteriorating credit quality may weigh on profitability and efficiency metrics.
Capital One Financial Corporation (COF - Free Report) is well-positioned for top-line growth, supported by decent consumer loan demand amid relatively high rates. Also, solid credit card and online banking operations will likely keep aiding financials. The acquisition of Discover Financial has reshaped the landscape of the credit card space, leading to the formation of a behemoth. However, elevated expenses and deteriorating asset quality remain major near-term concerns, which may hamper the company’s profitability.
COF’s Growth Drivers
Robust Inorganic Expansion Strategy: Over the years, Capital One's revenues have been driven by opportunistic acquisitions. Last month, COF acquired Discover Financial in an all-stock transaction valued at $35.3 billion, unlocking substantial value for shareholders. In 2023, it acquired Velocity Black, bolstering the delivery of exceptional consumer experiences attributable to its innovative technology.
Also, Capital One’s Credit Card segment is expected to continue to show strength. While in May 2024, COF ended its card partnership with Walmart, its 2017 acquisition of Cabela's Incorporated’s credit card operations bodes well.
Though COF’s total revenues declined marginally in 2020, the metric witnessed a five-year (2019-2024) compound annual growth rate (CAGR) of 6.5%, with the upward momentum continuing in the first quarter of 2025.
Revenue Growth
Image Source: Zacks Investment Research
COF’s revenue prospects look encouraging, given its solid credit card and online banking businesses, and decent loan demand. We expect Domestic Credit Card division revenues to increase 3% in 2025, 3.1% in 2026 and 3.2% in 2027. Revenues in the Credit Card segment are expected to see a CAGR of 3.1% by 2027. The company’s total revenues are anticipated to see a CAGR of 4.2%.
Increasing Net Interest Margin: While the Federal Reserve begun cutting interest rates, Capital One is likely to keep benefiting from relatively high rates, along with the steady demand for credit card loans. The company’s net interest margin (NIM) has been rising, driven by the high-rate regime. In 2024, NIM expanded to 6.88% from the 2023 level of 6.63%. The uptrend continued in the first quarter of 2025.
COF’s efforts to scale its business, along with relatively high rates, will likely keep benefiting NIM growth. We project the company’s NIM to be 7.03% in 2025, 7.20% in 2026 and 7.27% in 2027.
Solid Balance Sheet Position: As of March 31, 2025, Capital One had total debt (securitized debt obligations plus other debt) worth $41.8 billion, and the total cash and cash equivalents balance was $48.6 billion, which makes it well-positioned in terms of its liquidity profile and earnings strength.
Moreover, 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 the first quarter of 2021, which was then hiked 50% to 60 cents in July 2021. COF also has a share repurchase plan in place. In January 2022, it authorized a repurchase program of up to $5 billion in shares, while in April 2022, it announced an additional $5 billion worth of buybacks (effective from the third quarter of 2022). As of March 31, 2025, $3.88 billion worth of repurchase authorization remained.
Thus, given its earnings strength, and solid liquidity and balance sheet positions, the company’s enhanced capital distribution plans look sustainable.
Currently, COF carries a Zacks Rank #3 (Hold). Over the past six months, shares of the company have gained 3.2%, outperforming the industry’s growth of 2.7%.
Half-Yearly Price Performance
Image Source: Zacks Investment Research
Challenges for COF
Deteriorating Asset Quality: Weak asset quality is a major concern for Capital One. Provision for credit losses and net charge-offs (NCOs) have increased amid the tough macroeconomic backdrop. Though the company recorded a provision benefit in 2021, provision for credit losses witnessed a CAGR of 13.4% over the last five years (2019-2024). Likewise, NCOs recorded a CAGR of 11.4% in the same time frame.
While provisions declined in the first quarter of 2025, the company’s credit quality is expected to remain under pressure due to the tough macroeconomic outlook and persistent inflation. We project provision for credit losses and NCOs to remain elevated in the near term.
Mounting Expense Base: COF has been witnessing a persistent rise in expenses. Though expenses declined in 2020, the metric saw a CAGR of 6.8% over the last five years (ended 2024). The increase was mainly because of a rise in marketing costs (saw a CAGR of 14.9% in the same time frame) and inflationary pressure. The uptrend in costs continued in the first quarter of 2025.
Expense Growth Trend
Image Source: Zacks Investment Research
Given the company’s investments in technology and infrastructure, as well as inorganic expansion efforts, expenses are anticipated to remain elevated. The rise in the cost of modern tech talent and continued investments in growth opportunities will strain annual operating efficiency in the near term. We project total non-interest expenses to increase 9.4% in 2025. Further, our estimate for the 2025 efficiency ratio is 57.73%, which is higher than 54.93% in 2024.
Estimates for ECPG’s current-year earnings have been revised 11.6% upward in the past 60 days. The company’s shares have lost 24.2% over the past six months.
Estimates for SLM’s current-year earnings have been revised 1.6% north in the past 60 days. The company’s shares have gained 20.6% over the past six months.
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Capital One Rides on Strong Credit Card Business Despite Cost Woes
Key Takeaways
Capital One Financial Corporation (COF - Free Report) is well-positioned for top-line growth, supported by decent consumer loan demand amid relatively high rates. Also, solid credit card and online banking operations will likely keep aiding financials. The acquisition of Discover Financial has reshaped the landscape of the credit card space, leading to the formation of a behemoth. However, elevated expenses and deteriorating asset quality remain major near-term concerns, which may hamper the company’s profitability.
COF’s Growth Drivers
Robust Inorganic Expansion Strategy: Over the years, Capital One's revenues have been driven by opportunistic acquisitions. Last month, COF acquired Discover Financial in an all-stock transaction valued at $35.3 billion, unlocking substantial value for shareholders. In 2023, it acquired Velocity Black, bolstering the delivery of exceptional consumer experiences attributable to its innovative technology.
Also, Capital One’s Credit Card segment is expected to continue to show strength. While in May 2024, COF ended its card partnership with Walmart, its 2017 acquisition of Cabela's Incorporated’s credit card operations bodes well.
Though COF’s total revenues declined marginally in 2020, the metric witnessed a five-year (2019-2024) compound annual growth rate (CAGR) of 6.5%, with the upward momentum continuing in the first quarter of 2025.
Revenue Growth
Image Source: Zacks Investment Research
COF’s revenue prospects look encouraging, given its solid credit card and online banking businesses, and decent loan demand. We expect Domestic Credit Card division revenues to increase 3% in 2025, 3.1% in 2026 and 3.2% in 2027. Revenues in the Credit Card segment are expected to see a CAGR of 3.1% by 2027. The company’s total revenues are anticipated to see a CAGR of 4.2%.
Increasing Net Interest Margin: While the Federal Reserve begun cutting interest rates, Capital One is likely to keep benefiting from relatively high rates, along with the steady demand for credit card loans. The company’s net interest margin (NIM) has been rising, driven by the high-rate regime. In 2024, NIM expanded to 6.88% from the 2023 level of 6.63%. The uptrend continued in the first quarter of 2025.
COF’s efforts to scale its business, along with relatively high rates, will likely keep benefiting NIM growth. We project the company’s NIM to be 7.03% in 2025, 7.20% in 2026 and 7.27% in 2027.
Solid Balance Sheet Position: As of March 31, 2025, Capital One had total debt (securitized debt obligations plus other debt) worth $41.8 billion, and the total cash and cash equivalents balance was $48.6 billion, which makes it well-positioned in terms of its liquidity profile and earnings strength.
Moreover, 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 the first quarter of 2021, which was then hiked 50% to 60 cents in July 2021. COF also has a share repurchase plan in place. In January 2022, it authorized a repurchase program of up to $5 billion in shares, while in April 2022, it announced an additional $5 billion worth of buybacks (effective from the third quarter of 2022). As of March 31, 2025, $3.88 billion worth of repurchase authorization remained.
Thus, given its earnings strength, and solid liquidity and balance sheet positions, the company’s enhanced capital distribution plans look sustainable.
Currently, COF carries a Zacks Rank #3 (Hold). Over the past six months, shares of the company have gained 3.2%, outperforming the industry’s growth of 2.7%.
Half-Yearly Price Performance
Image Source: Zacks Investment Research
Challenges for COF
Deteriorating Asset Quality: Weak asset quality is a major concern for Capital One. Provision for credit losses and net charge-offs (NCOs) have increased amid the tough macroeconomic backdrop. Though the company recorded a provision benefit in 2021, provision for credit losses witnessed a CAGR of 13.4% over the last five years (2019-2024). Likewise, NCOs recorded a CAGR of 11.4% in the same time frame.
While provisions declined in the first quarter of 2025, the company’s credit quality is expected to remain under pressure due to the tough macroeconomic outlook and persistent inflation. We project provision for credit losses and NCOs to remain elevated in the near term.
Mounting Expense Base: COF has been witnessing a persistent rise in expenses. Though expenses declined in 2020, the metric saw a CAGR of 6.8% over the last five years (ended 2024). The increase was mainly because of a rise in marketing costs (saw a CAGR of 14.9% in the same time frame) and inflationary pressure. The uptrend in costs continued in the first quarter of 2025.
Expense Growth Trend
Image Source: Zacks Investment Research
Given the company’s investments in technology and infrastructure, as well as inorganic expansion efforts, expenses are anticipated to remain elevated. The rise in the cost of modern tech talent and continued investments in growth opportunities will strain annual operating efficiency in the near term. We project total non-interest expenses to increase 9.4% in 2025. Further, our estimate for the 2025 efficiency ratio is 57.73%, which is higher than 54.93% in 2024.
COF’s Peer Stocks Worth Considering
A couple of better-ranked stocks from the same space are Encore Capital Group, Inc. (ECPG - Free Report) and SLM Corporation (SLM - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Estimates for ECPG’s current-year earnings have been revised 11.6% upward in the past 60 days. The company’s shares have lost 24.2% over the past six months.
Estimates for SLM’s current-year earnings have been revised 1.6% north in the past 60 days. The company’s shares have gained 20.6% over the past six months.