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Credit Card Loans to Support Capital One's (COF) Q3 Earnings

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Capital One (COF - Free Report) is slated to reportthird-quarter 2019 results on Oct 24, after market close. While its revenues are expected to have improved year over year, earnings are likely to have witnessed a decline.

In the last reported quarter, the company’s adjusted earnings surpassed the Zacks Consensus Estimate. Results benefited from rise in net interest income, improving loan balances and strength in card business, partially offset by higher costs and provisions.

Capital One has an impressive earnings surprise history. Its earnings surpassed estimates in three of the trailing four quarters, the average positive surprise being 3.1%.

With improving consumer sentiments and decent lending scenario, analysts seem bullish on the stock. As a result, the Zacks Consensus Estimate for earnings per share of $2.87 moved 1.1% upward over the past seven days. Nonetheless, it indicates fall of 8% from the year-ago reported figure. The consensus estimate for revenues of $7.18 billion suggests 3.2% rise.

Major Factors

Slight improvement in net interest income (NII): Per the Fed’s latest data, consumer loans, specifically credit card loans, recorded decent growth in the third quarter. This, along with Capital One’s efforts to strengthen its card operations, might have supported NII to some extent.

The Zacks Consensus Estimate for average interest earning assets of $344.7 billion suggests a 2% rise from the prior-quarter reported figure. However, flattening/inversion of the yield curve and lower interest rates are likely to have slightly hampered growth. Thus, NII is likely to have recorded modest rise.

Higher fee income: As the quarter might have witnessed an increase in card usage, interchange fees (major part of its fee income) are likely to have risen. Thus, Capital One might have recorded an increase in fee income in the to-be-reported quarter.

Rise in expenses: Operating expenses are likely to have trended upward in the to-be-reported quarter, mainly driven by the company’s inorganic growth efforts and technology upgrades. Specifically, marketing expenses might have remained elevated,given the rising loan growth opportunities.

Additionally, data breach incident is likely to have had an unfavorable impact on Capital One’s expense base in the to-be-reported quarter. Apart from additional costs related to notifying customers, the company’s legal provisions might have increased.

Worsening asset quality: While improvement in card loans is leading to an increase in interest income, Capital One is expected to have witnessed a rise in credit card delinquency rates. Also, the charge-off rate in auto finance business might have increased.

The Zacks Consensus Estimate for net charge-offs of $1.52 billion indicates nearly 1% sequential rise.

Now, let’s have a look at what our quantitative model predicts:

The chances of Capital One beating the Zacks Consensus Estimate in the third quarter are less. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Capital One is -0.60%.

Zacks Rank: Capital One currently has a Zacks Rank #2 (Buy).

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming release.

Huntington Bancshares Incorporated (HBAN - Free Report) is scheduled to release results on Oct 24. It presently has an Earnings ESP of +0.60% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cullen/Frost Bankers, Inc (CFR - Free Report) is expected to release results on Oct 31. It currently has an Earnings ESP of +0.07% and a Zacks Rank #3.

Santander Consumer USA Holdings Inc. (SC - Free Report) is scheduled to release results on Oct 30. It has an Earnings ESP of +1.01% and a Zacks Rank #3.

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