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Credit Card Strength to Aid Capital One's (COF) Q4 Earnings

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Capital One COF is slated to report fourth quarter and 2019 results on Jan 21, after market close. Quarterly revenues and earnings are expected to have improved year over year.

In the last reported quarter, the company’s adjusted earnings outpaced the Zacks Consensus Estimate. Results benefited from rise in non-interest income and strength in card business, partly offset by higher costs and provisions, and decline in net interest income.

Further, Capital One has an impressive earnings surprise history. Its earnings surpassed estimates in three of the trailing four quarters, the positive surprise being 5%, on average.

Capital One Financial Corporation Price, Consensus and EPS Surprise

 

Capital One Financial Corporation Price, Consensus and EPS Surprise

Capital One Financial Corporation price-consensus-eps-surprise-chart | Capital One Financial Corporation Quote

Despite improving consumer sentiments and decent lending scenario, lower interest rates remain a major concern for Capital One. Thus, the analysts seem to have a neutral stance on the stock.

The Zacks Consensus Estimate for earnings has remained unchanged at $2.38 per share over the past seven days. Nonetheless, it indicates a jump of 27.3% from the year-ago reported figure. The consensus estimate for revenues of $7.36 billion suggests 5% rise.

Factors at Play

Muted growth in net interest income (NII): Per the Fed’s latest data, consumer loans, specifically credit card loans recorded muted growth in the fourth quarter. This, along with lower interest rates, is likely to have had an adverse impact on Capital One’s NII growth.

Nonetheless, Capital One’s efforts to strengthen its card operations might have supported NII to some extent. Further, the Zacks Consensus Estimate for average interest earning assets of $350.7 billion suggests a 4.8% rise from the prior-quarter reported figure. Thus, growth in NII is likely to have been weak.

Rise in fee income: As the quarter might have witnessed an increase in card usage (mainly attributable to holiday season), 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.

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

With the momentum in domestic cards and retail deposits, management expects marketing costs for 2019 to be modestly high year over year. Further, it expects operating efficiency ratio (net of adjustments) to improve slightly in 2019, excluding the one-time Walmart launch and integration expenses.

Further, the 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.

Walmart partnership impact: In September 2019, Capital One launched the new Walmart co-brand and private label cards. On Oct 11, it closed the acquisition of the existing Walmart card portfolio, with on-boarding of $8.1 billion in loans.

Per management, due to the revenue and loss sharing provisions, the acquired Walmart portfolio is expected to affect the Domestic Card division’s metrics. The acquired portfolio will reduce the division’s revenue margin by nearly 35 basis points (bps) in the to-be-reported quarter.

Further, the portfolio is projected to lower the division’s charge-off rate by about 25 bps, while at the same time anticipate to increase its delinquency rate by roughly the same number. Also, Capital One had expected initial allowance build of roughly $85 million, which will be part of fourth-quarter 2019 allowance.

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, charge-off rate in auto finance business might have increased.

The Zacks Consensus Estimate for net charge-offs of $1.66 billion indicates 2.9% year over year rise.

Redemption of preferred shares: As the company redeemed outstanding preferred Series C and D stocks in December, it will result in a one-time charge that will lead to nearly $30 million decline in net income available to common shareholders in the fourth quarter.

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

Chances of Capital One beating the Zacks Consensus Estimate in the fourth 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 -3.78%.

Zacks Rank: Capital One currently has a Zacks Rank #3.

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.

Zions Bancorporation, N.A. ZION is scheduled to release results on Jan 21. It presently has an Earnings ESP of +2.99% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TD Ameritrade Holding Corporation AMTD is slated to announce results on Jan 21. It currently has an Earnings ESP of +0.39% and a Zacks Rank #3.

Commerce Bancshares, Inc. (CBSH - Free Report) is scheduled to release results on Jan 22. It has an Earnings ESP of +0.12% and a Zacks Rank #3.

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