Capital One (COF) Stock Up on Q3 Earnings Beat, Costs Rise

Shares of Capital One Financial Corporation COF rose 1.9% in after-market trading as the company’s third-quarter 2017 adjusted earnings of $2.42 per share handily outpaced the Zacks Consensus Estimate of $2.15. Also, it compared favorably with the year-ago quarter’s earnings of $2.03.

Results benefited from higher revenues and easing margin pressure. Also, the quarter witnessed a rise in loan balance. However, increase in provisions and expenses acted as headwinds.

After taking into consideration charges related the Cabela’s acquisition, net income for the quarter came in at $1.11 billion or $2.14 per share. This was up from $1 billion or $1.90 per share recorded in the prior-year quarter.

Revenues Growth Supports Results

Net revenues were $6.99 billion, up 8% year over year. Also, the figure topped the Zacks Consensus Estimate of $6.83 billion.

Net interest income grew 8% from the prior-year quarter to $5.70 billion. Also, net interest margin increased 29 basis points (bps) year over year to 7.08%.

Non-interest income increased 9% year over year to $1.29 billion. The increase was largely driven by a rise in net interchange fees, partially offset by a decline in other income, and service charges and other customer-related fees.

Non-interest expenses of $3.57 billion rose 6% from the year-ago quarter. All cost components, except amortization of intangibles, occupancy and equipment, and marketing, rose year over year.

Efficiency ratio came in at 51.07% compared with 52.02% in the year-ago quarter. A decrease in efficiency ratio indicates improved profitability.

Strong Balance Sheet

As of Sep 30, 2017, loans held for investment were $252.4 billion, up 3% from the prior quarter. Total deposits, as of the same date, remained relatively stable sequentially at $239.06 billion.

Total stockholder’s equity was $50.15 billion as of Sep 30, 2017, a rise of 2% from the previous quarter.

Credit Quality Worsens

Net charge-off rate jumped 51 bps year over year to 2.61%. Further, provision for credit losses rose 15% from the year-ago quarter to $1.83 billion.

Also, the 30-plus day performing delinquency rate increased 22 bps year over year to 2.93%. Likewise, allowance, as a percentage of reported loans held for investment was 2.94%, up 31 bps year over year.

Strong Profitability & Capital Ratios

Return on average assets was 1.28% at the end of the reported quarter, up from 1.18% in the year-ago quarter. Also, return on average common equity increased to 9.40% from 8.59% in the prior-year quarter.

As of Sep 30, 2017, Tier 1 risk-based capital ratio was 12.2%, up from 12% in the prior-year quarter. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.7% as of Jun 30, 2017, up from 10.6% as of Sep 30, 2016.

Our Viewpoint

Capital One’s strategic acquisitions over the years position it well for long-term growth. These buyouts include Cabela’s Incorporated’s credit card portfolio, General Electric Company’s GE healthcare-related loans and its Healthcare Financial Services business, HSBC Holdings plc’s HSBC credit card business and ING Direct USA, the online banking unit of ING Groep NV ING.

However, increasing expenses continue to hurt Capital One's profitability. Also, deteriorating credit quality remains a major near-term concern. In fact, asset quality is likely to continue to remain under pressure due to losses in the auto portfolio and U.S. card business.

Capital One Financial Corporation Price, Consensus and EPS Surprise

 

Capital One Financial Corporation Price, Consensus and EPS Surprise | Capital One Financial Corporation Quote

Currently, Capital One carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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