Capital One’s credit card and online banking segments, along with strategic acquisitions, are expected to support the company’s finances in the coming quarters. The high demand for consumer loans and increasing interest rates are likely to fuel top-line growth.
However, increasing expenses and deteriorating asset quality pose a challenge to the company’s growth prospects. Analysts are also not optimistic about Capital One’s earnings growth projections, with the Zacks Consensus Estimate for its earnings for the current year revised downward by 12.8% over the past 30 days. Capital One currently has a Zacks Rank #3 (Hold).
COF’s shares lost 20.1% in the past year compared to the industry’s decline of 15.6%.
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Capital One’s revenue declined slightly in 2020, but it increased by a five-year (2017-2022) compound annual growth rate (CAGR) of 4.7%. The trend continued in the first quarter of 2023. Opportunistic buyouts bolstered its revenues.
In 2021, COF acquired TripleTree, LLC, which will enhance its investment banking capability. In 2019, it entered the merger and acquisition market by acquiring KippsDeSanto. Capital One’s revenue diversification efforts are evidenced by its acquisition of Beech Street Capital and GE’s healthcare unit.
Revenue prospects look bright, with a solid credit card and online banking business complementing robust loan demand. Total revenues are expected to grow by 3.1%, 2.5%, and 7.3% in 2023, 2024, and 2025, respectively.
After reducing rates thrice in 2019, the Federal Reserve cut interest rates to near zero in March 2020 to mitigate the impact of the COVID-19 pandemic on the US economy. This move hurt COF’s net interest income (NII) and net interest margin (NIM). However, with the Federal Reserve anticipated to maintain high interest rates in the near future (although at a slower pace), there are chances of continued growth in NII and NIM. The CAGR estimates for NII is 4.2% by 2025.
Capital One’s capital-deployment initiatives are encouraging. After decreasing the quarterly dividend by 75% in 2020 per the Federal Reserve’s requirements, Capital One restored it to 40 cents per share in 2021 and increased it by 50% to 60 cents per share in July 2021.
The company has a share repurchase plan in place, and with its earnings strength and a strong liquidity position, Capital One’s enhanced capital deployment plans are sustainable.
Deteriorating Asset Quality:
The company’s asset quality has been declining lately. Provision for credit losses and net charge-offs (NCOs) have been rising steadily. The provisions fell in 2018 and were favorable in 2021, but they rose in the remaining years until 2022. Similarly, NCOs declined in 2018, 2020, and 2021, but they increased in 2019 and 2022. Both provisions and NCOs rose in the first quarter of 2023. Given the rising loan balance and deteriorating macroeconomic outlook, the company’s credit quality is likely to remain under pressure in the near future.
COF’s expenses increased by a CAGR of 6.2% in the last five years (ended 2022) due to rising marketing costs and inflationary pressure. The trend continued in the first quarter of 2023. Given the continued investments in technology and infrastructure and its inorganic expansion endeavors, expense levels are expected to remain high. The CAGR estimates for total non-interest expenses suggest a 7.8% rate by 2025.
Stocks to Consider
Pathward Financial, Inc. CASH and First Citizens BancShares FCNCA are two better-ranked stocks in the finance space. The Zacks Consensus Estimate for Pathward Financial’s earnings for the current fiscal year has been revised upward by 1.8% over the past 60 days. The company’s shares have gained 12.1% in the past year. Currently, CASH carries a Zacks Rank #2 (Buy). First Citizens BancShares has a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised upward by 67.2% over the past 60 days. Shares of FCNCA have rallied 89.5% in the past year.
We caution that the views and opinions expressed are those of the author and do not reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.