A month has gone by since the last earnings report for Capital One (COF - Free Report) . Shares have added about 0.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Capital One due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Capital One Q3 Earnings Beat Estimates, Expenses Rise
Capital One announced third-quarter 2018 adjusted earnings of $3.12 per share, which easily surpassed the Zacks Consensus Estimate of $2.89. Also, it compared favorably with the year-ago quarter’s adjusted earnings of $2.42.
Results benefited from rise in net interest income and strength in card business. Further, a decline in provision for credit losses and improving loans and deposits were the tailwinds. However, lower non-interest income and an increase in operating expenses hurt the results to some extent.
After taking into consideration the non-recurring items, net income available to common shareholders was $1.44 billion or $3.01 per share, up from $1.05 billion or $2.16 per share in the prior-year quarter.
Revenues Stable, Expenses Rise
Net revenues were $6.96 billion, relatively stable year over year. The figure beat the Zacks Consensus Estimate of $6.85 billion.
Net interest income grew 2% from the prior-year quarter to $5.79 billion. However, net interest margin decreased 7 basis points (bps) to 7.01%.
Non-interest income declined 8% year over year to $1.18 billion. The decrease was due to lower service charges and other customer-related fees and net securities losses, partially offset by rise in net interchange fees and other income.
Non-interest expenses of $3.77 billion were up 6% year over year, mainly owing to 33% jump in marketing costs.
Efficiency ratio was 54.19% compared with 51.07% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.
Credit Quality: A Mixed Bag
Net charge-off rate decreased 20 bps year over year to 2.41%. Also, provision for credit losses declined 31% to $1.27 billion.
However, the 30-plus day performing delinquency rate increased 35 bps year over year to 3.28%. Likewise, allowance as a percentage of reported loans held for investment was 3.02%, up 8 bps.
Strong Loan and Deposit Balances
As of Sep 30, 2018, loans held for investment were $238.76 billion, up 1% from the prior quarter. Also, total deposits, as of the same date, were relatively stable sequentially at $247.20 billion.
Profitability & Capital Ratios Improve
Return on average assets was 1.66% at the end of the reported quarter, up from 1.28% in the year-ago quarter. Also, return on average common equity was 12.40%, up from 9.40% in the prior-year quarter.
As of Sep 30, 2018, Tier 1 risk-based capital ratio was 12.8%, up from 12.2% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 11.2% as of Sep 30, 2018, up from 10.7% as of Sep 30, 2017.
During the reported quarter, Capital One repurchased nearly 5.8 million shares for $570 million. This was part of the company’s 2018 capital plan.
In the long term, management remains optimistic about deriving efficiency improvement driven by growth and digital productivity gains.
In Consumer Banking business, the company projects further rise in average deposit interest rates, driven by higher market rates and increasing competition for deposits along with changing product mix.
In Consumer banking segment, the charge-off rate in auto finance business will increase gradually and loan growth will moderate.
Attractive and resilient loans in card, auto and commercial banking businesses along with growth in deposits in consumer banking business are anticipated. Marketing expenses in 2018 are likely to be higher than 2017 with mostly increases expected in the second half of the year.
Management expects 2018 operating efficiency ratio to be roughly flat year over year.
For 2018, management expects effective tax rate to be around 22%.
The company's common equity Tier 1 capital ratio (on a fully phased-in basis) will rise around 11% by 2018-end.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.15% due to these changes.
At this time, Capital One has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Capital One has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.