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Relatively High Rates, Buyouts Aid Capital One Amid Weak Asset Quality
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Key Takeaways
COF's Discover deal and solid card segment support growth despite rising credit risks.
Relatively high interest rates are boosting COF's net interest income and net interest margin.
COF's rising costs and elevated charge-offs challenge its efficiency and asset quality outlook.
Capital One Financial Corporation (COF - Free Report) remains well-positioned for growth on the back of strategic acquisitions, relatively higher interest rates, a strong balance sheet and a solid Credit Card segment. However, an elevated expense base and worsening asset quality remain challenges.
Capital One’s Growth Drivers
Opportunistic Acquisitions: Capital One has been engaged in strategic acquisitions to boost its revenues. This May, the company acquired Discover Financial in a 100% stock deal for $35.3 billion. This move aims to transform the credit card industry landscape by establishing a major player to unlock substantial shareholder value.
In 2023, COF acquired Velocity Black to enhance its delivery of a remarkable customer experience through its innovative technology. These, along with other buyouts, reflect Capital One’s revenue diversification efforts.
While the company’s revenues dipped marginally in 2020, the same reflected a five-year (2019-2024) compound annual growth rate (CAGR) of 6.5%. Moreover, net loans held for investment (LHI) recorded a CAGR of 4.3% in the same time frame. The uptrend continued for both metrics during the first quarter of 2025. Solid credit card and online banking businesses, the Discover Financial buyout and decent loan demand keep the company’s revenue prospects encouraging.
Revenue Trend
Image Source: Zacks Investment Research
We project Credit Card segment revenues to record a CAGR of 4.4% and total revenues to see a CAGR of 5.5% by 2027. Further, by 2027-end, net LHI is anticipated to witness a CAGR of 3.9%.
Relatively High Rates to Aid Net Interest Margin: Relatively higher rates are likely to benefit Capital One. Additionally, the persisting demand for credit card loans will offer support. The company’s net interest income (NII) and net interest margin (NIM) have been increasing.
NII reflected a CAGR of 6% over the five years ended 2024. Also, NIM expanded to 6.88% in 2024 from 6.63% in 2023. The uptrend for NII and NIM continued in the first three months of 2025. Thus, demand for credit card loans, relatively high rates and Capital One’s efforts to scale its business are expected to boost NII and NIM.
NII & NIM Trends
Image Source: Capital One Financial Corp.
We project NII to grow 4.5%, 4.9% and 3.5% in 2025, 2026 and 2027, respectively. The company’s NIM is projected to be 7.03% in 2025, 7.20% in 2026 and 7.55% in 2027.
Solid Balance Sheet: As of March 31, 2025, COF’s total debt (comprising securitized debt obligations and other debt) was $41.8 billion, and the total cash and cash equivalents were $48.6 billion.
Further, the company enjoys investment-grade credit ratings of Baa1, BBB and A- from Moody’s Investors Service, Standard and Poor’s and Fitch Ratings, respectively, enabling greater accessibility to debt markets.
Also, the company hiked its quarterly dividends by 50% to 60 cents per share in 2021 and also announced a special dividend of 60 cents per share.
It 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, nearly $3.88 billion worth of repurchase authorization remained.
A strong liquidity profile and earnings strength enable the company to address its debt obligations and sustain its capital distributions in the near term.
Strong Credit Card Segment Operations: Capital One’s Credit Card segment is likely to remain solid. Though the company ceased its card partnership with Walmart in May 2024, the 2017 acquisition of Cabela's Incorporated’s credit card operations bodes well for the future.
In the first quarter of 2025, the Domestic Credit Card division, which accounted for 94.9% of Credit Card net revenues, reflected an improvement in LHI. The division’s total LHI accounts for almost 46% of the total LHI. Strong growth opportunities in card loans and purchase volumes will likely continue despite an intensely competitive environment.
We expect Domestic Credit Card division revenues to increase 3% in 2025, 3.1% in 2026 and 7.2% in 2027.
COF currently carries a Zacks Rank #3 (Hold). Year to date, shares of the company have gained 15.7%, outperforming the industry’s growth of 12.1%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Challenges for COF
Deteriorating Asset Quality: Capital One’s worsening credit quality remains a concern. Provisions for credit losses and net charge-offs (NCOs) have risen amid the challenging operating backdrop. While the company recorded a provision benefit in 2021, the metric witnessed a 13.4% CAGR over the five years ended 2024. Similarly, NCOs recorded a CAGR of 11.4% in the same time frame.
While provisions dipped and NCOs rose 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.
Elevated Expenses: COF’s expenses have been rising over the past few years. While expenses dipped in 2020, the same witnessed a 6.8% CAGR over the last five years (2019-2024). The rise has been primarily driven by an increase in marketing costs (recorded a CAGR of 14.9% in the same time frame) and inflationary pressure. The uptrend persisted during the first quarter of 2025.
Expense Growth Trend
Image Source: Zacks Investment Research
Expenses are likely to stay elevated amid the company’s ongoing investments in technology and infrastructure and inorganic expansion efforts. The rise in the cost of modern tech talent and continued investments in growth opportunities will exert pressure on annual operating efficiency in the near term.
We project total non-interest expenses to increase 12.5% in 2025. Further, our estimate for the 2025 efficiency ratio is 59.33%, which is higher than 54.93% in 2024.
Consumer Loan Stocks Worth Considering
Some better-ranked finance stocks worth considering are Nelnet, Inc. (NNI - Free Report) and Encore Capital Group, Inc. (ECPG - Free Report) .
Estimates for NNI’s current-year earnings have been revised 16.8% upward in the past 60 days. The company’s shares have risen 11% in the past six months. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
Estimates for ECPG’s current-year earnings have been revised 11.6% upward in the past two months. The company’s shares have lost 18% in the past six months. It currently carries a Zacks Rank #2 (Buy).
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Relatively High Rates, Buyouts Aid Capital One Amid Weak Asset Quality
Key Takeaways
Capital One Financial Corporation (COF - Free Report) remains well-positioned for growth on the back of strategic acquisitions, relatively higher interest rates, a strong balance sheet and a solid Credit Card segment. However, an elevated expense base and worsening asset quality remain challenges.
Capital One’s Growth Drivers
Opportunistic Acquisitions: Capital One has been engaged in strategic acquisitions to boost its revenues. This May, the company acquired Discover Financial in a 100% stock deal for $35.3 billion. This move aims to transform the credit card industry landscape by establishing a major player to unlock substantial shareholder value.
In 2023, COF acquired Velocity Black to enhance its delivery of a remarkable customer experience through its innovative technology. These, along with other buyouts, reflect Capital One’s revenue diversification efforts.
While the company’s revenues dipped marginally in 2020, the same reflected a five-year (2019-2024) compound annual growth rate (CAGR) of 6.5%. Moreover, net loans held for investment (LHI) recorded a CAGR of 4.3% in the same time frame. The uptrend continued for both metrics during the first quarter of 2025. Solid credit card and online banking businesses, the Discover Financial buyout and decent loan demand keep the company’s revenue prospects encouraging.
Revenue Trend
Image Source: Zacks Investment Research
We project Credit Card segment revenues to record a CAGR of 4.4% and total revenues to see a CAGR of 5.5% by 2027. Further, by 2027-end, net LHI is anticipated to witness a CAGR of 3.9%.
Relatively High Rates to Aid Net Interest Margin: Relatively higher rates are likely to benefit Capital One. Additionally, the persisting demand for credit card loans will offer support. The company’s net interest income (NII) and net interest margin (NIM) have been increasing.
NII reflected a CAGR of 6% over the five years ended 2024. Also, NIM expanded to 6.88% in 2024 from 6.63% in 2023. The uptrend for NII and NIM continued in the first three months of 2025. Thus, demand for credit card loans, relatively high rates and Capital One’s efforts to scale its business are expected to boost NII and NIM.
NII & NIM Trends
Image Source: Capital One Financial Corp.
We project NII to grow 4.5%, 4.9% and 3.5% in 2025, 2026 and 2027, respectively. The company’s NIM is projected to be 7.03% in 2025, 7.20% in 2026 and 7.55% in 2027.
Solid Balance Sheet: As of March 31, 2025, COF’s total debt (comprising securitized debt obligations and other debt) was $41.8 billion, and the total cash and cash equivalents were $48.6 billion.
Further, the company enjoys investment-grade credit ratings of Baa1, BBB and A- from Moody’s Investors Service, Standard and Poor’s and Fitch Ratings, respectively, enabling greater accessibility to debt markets.
Also, the company hiked its quarterly dividends by 50% to 60 cents per share in 2021 and also announced a special dividend of 60 cents per share.
It 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, nearly $3.88 billion worth of repurchase authorization remained.
A strong liquidity profile and earnings strength enable the company to address its debt obligations and sustain its capital distributions in the near term.
Strong Credit Card Segment Operations: Capital One’s Credit Card segment is likely to remain solid. Though the company ceased its card partnership with Walmart in May 2024, the 2017 acquisition of Cabela's Incorporated’s credit card operations bodes well for the future.
In the first quarter of 2025, the Domestic Credit Card division, which accounted for 94.9% of Credit Card net revenues, reflected an improvement in LHI. The division’s total LHI accounts for almost 46% of the total LHI. Strong growth opportunities in card loans and purchase volumes will likely continue despite an intensely competitive environment.
We expect Domestic Credit Card division revenues to increase 3% in 2025, 3.1% in 2026 and 7.2% in 2027.
COF currently carries a Zacks Rank #3 (Hold). Year to date, shares of the company have gained 15.7%, outperforming the industry’s growth of 12.1%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Challenges for COF
Deteriorating Asset Quality: Capital One’s worsening credit quality remains a concern. Provisions for credit losses and net charge-offs (NCOs) have risen amid the challenging operating backdrop. While the company recorded a provision benefit in 2021, the metric witnessed a 13.4% CAGR over the five years ended 2024. Similarly, NCOs recorded a CAGR of 11.4% in the same time frame.
While provisions dipped and NCOs rose 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.
Elevated Expenses: COF’s expenses have been rising over the past few years. While expenses dipped in 2020, the same witnessed a 6.8% CAGR over the last five years (2019-2024). The rise has been primarily driven by an increase in marketing costs (recorded a CAGR of 14.9% in the same time frame) and inflationary pressure. The uptrend persisted during the first quarter of 2025.
Expense Growth Trend
Image Source: Zacks Investment Research
Expenses are likely to stay elevated amid the company’s ongoing investments in technology and infrastructure and inorganic expansion efforts. The rise in the cost of modern tech talent and continued investments in growth opportunities will exert pressure on annual operating efficiency in the near term.
We project total non-interest expenses to increase 12.5% in 2025. Further, our estimate for the 2025 efficiency ratio is 59.33%, which is higher than 54.93% in 2024.
Consumer Loan Stocks Worth Considering
Some better-ranked finance stocks worth considering are Nelnet, Inc. (NNI - Free Report) and Encore Capital Group, Inc. (ECPG - Free Report) .
Estimates for NNI’s current-year earnings have been revised 16.8% upward in the past 60 days. The company’s shares have risen 11% in the past six months. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
Estimates for ECPG’s current-year earnings have been revised 11.6% upward in the past two months. The company’s shares have lost 18% in the past six months. It currently carries a Zacks Rank #2 (Buy).