Capital One Stock Posted Better Than Expected Results in Q4, Is It A Buy?

[Updated 02/10/2022] Capital One Valuation Update

Capital One’s stock (NYSE: COF) has gained roughly 9% YTD as compared to the 4% drop in the S&P500 over the same period. Further, at its current price of $159 per share, it is trading 15% below its fair value of $182 – Trefis’ estimate for Capital One’s valuation. The company reported better than expected results in the fourth quarter of 2021, with revenues increasing 11% y-o-y to $11.1 billion. It was driven by a 10% rise in the net interest income (NII), followed by a 14% growth in the noninterest income. While the NII benefited from higher net interest margin and loan growth, the rise in noninterest revenues was due to higher interchange fees. Notably, the credit-card purchase volume increased 28% y-o-y in the quarter. That said, the provisions for credit losses added $381 million in Q4 – up 44% y-o-y, as compared to the negative provisions figure (credit reserve release) in the first three quarters of the year. Further, the noninterest expenses as a % of revenues rose from 55% to 58%. Overall, the adjusted net income decreased 7% y-o-y to $2.3 billion. 

The company’s total revenues increased 7% y-o-y to $30.3 billion in 2021. The growth was because of an 8% rise in domestic credit card revenues, followed by a 17% jump in consumer banking, and an 11% increase in commercial banking segments. The domestic credit card business benefited from a 26% y-o-y rise in the noninterest income due to improvement in the consumer spending levels. Similarly, the consumer banking revenue growth was due to a recovery in the outstanding loan balances and a higher net interest margin. 

The Fed is expected to increase the interest rates in 2022, leading to higher net interest income for the lenders. Further, the recovery in the economic conditions is likely to drive the noninterest revenues. Overall, the Capital One revenues are likely to touch $33 billion in FY2022. Additionally, COF’s net income margin increased from 8.3% to 39.3% in 2021, thanks to the favorable decrease in the provisions figure. We expect the provisions to see some increase in 2022, leading to a correction in the net interest margin. We expect the company to report an adjusted net income of $8.1 billion and an annual EPS of $19.62. This coupled with a P/E multiple of just above 9x will lead to the valuation of $182.

Below you’ll find our previous coverage of Capital One stock where you can track our view over time.

[Updated 12/14/2021] Capital One Stock Has A 20% Upside Potential

Capital One’s stock (NYSE: COF) has gained around 48% YTD, and at its current price near $146 per share, it is trading 20% below its fair value of $182 – Trefis’ estimate for Capital One’s valuation. The company surpassed the street expectations in the third quarter, with its revenues growing 6% y-o-y to $7.8 billion. This was because of an 11% y-o-y jump in net interest income (NII), partially offset by an 8% drop in non-interest income. While the NII benefited from lower rates on interest-bearing liabilities, higher loan balances, and a fall in the average cash balance, the non-interest income was down due to a drop in net securities gains. Further, the revenue growth translated into a 29% y-o-y growth in the adjusted net income to $3 billion, primarily due to a favorable decrease in the provision for credit losses from $331 million in Q3 2020 to -$342 million in the quarter.

Although the firm reported just a marginal fall in the 2020 revenues on a year-on-year basis to $28.5 billion, it was due to an unrealized valuation gain of $535 million on an equity investment. However, if we exclude the one-time gain, both the NII and the non-interest income were down due to interest rate headwinds and lower consumer activity levels. Further, the company has seen some improvement over the first three quarters of 2021 – cumulative nine months revenues increased 5% y-o-y to $22.3 billion. It was driven by a 4% rise in the NII, followed by an 11% jump in the non-interest revenues. The main reason behind this was growth in outstanding loan balances, lower rates on interest-bearing liabilities, and some recovery in the consumer spending levels. We expect the same trend to continue in the fourth quarter, enabling the Capital One revenues to touch $30.2 billion in FY2021. Additionally, COF’s net income margin is likely to improve in the year due to lower provisions for the credit losses, leading to an adjusted net income of $12.3 billion and an EPS figure of $30.07. This coupled with a P/E multiple of just above 6x will lead to the valuation of $182.

[Updated 09/30/2021] Capital One Stock Has Limited Upside

Capital One’s stock (NYSE: COF) has gained close to 70% YTD, and at its current price near $167 per share, it is trading 8% below its fair value of $182 – Trefis’ estimate for Capital One’s valuation. The credit card giant outperformed the consensus estimates in the second quarter of 2021, and its stock has gained 4% since then. It posted revenues of $7.4 billion, which were 12% more than the previous year. This could be attributed to a 49% y-o-y jump in non-interest revenues, followed by a 5% increase in net interest income (NII). The non-interest income benefited from higher interchange fees due to an increase in domestic card purchase volume. Further, the provision for credit losses decreased from $4.25 billion in Q2 2020 to -$1.16 billion in the quarter, improving its adjusted net income from -$1 billion to $3.45 billion.

The company reported total revenues of $28.5 billion in 2020 – slightly below the 2019 figure. The top-line suffered due to lower NII due to interest rate headwinds and a decrease in non-interest income (excluding the unrealized valuation gain of $535 million on an equity investment) driven by lower consumer spending levels. Notably, the firm is heavily dependent on NII, which generates close to 80% of the total revenues. Hence, changes in interest rates directly impact its revenues. Further, the NII continued to suffer in the first quarter of 2021. However, non-interest income saw positive growth due to improvement in purchase volume. The trend changed in the second quarter due to positive growth in both NII and non-interest income. The NII benefited from lower interest rates paid on interest-bearing deposits and higher average outstanding balances in the auto loan portfolio.

Moving forward, we expect the NII to report stagnant growth in FY2021, as low-interest rates are unlikely to see a swift revival back to the pre-Covid-19 levels. However, non-interest revenues are likely to see some recovery due to improvement in consumer spending levels. Overall, Capital One revenues are likely to remain around $29.4 billion in the year. Additionally, COF’s profitability numbers have significantly improved over the recent quarters, due to a favorable decrease in provisions for credit losses. We expect the firm to follow the same trend over the coming months. It will likely improve the net income margin, leading to an adjusted net income of $10.8 billion and EPS of $24.63. The EPS figure coupled with a P/E multiple of just above 7x will lead to the valuation of $182.

[Updated 06/08/2021] Capital One Stock Is Slightly Overvalued

Capital One stock (NYSE: COF) has gained around 65% YTD, increasing from about $99 at the beginning of 2021 to around $164 currently, significantly ahead of the S&P500, which grew 13% over the same period. Trefis estimates Capital One’s valuation to be around $157 per share – slightly below the current market price. The recent stock rise could be attributed to the approval of the stimulus package, accelerated Covid-19 vaccination drive, and the Fed’s decision to maintain near-zero rates, which has strengthened the prospects of a strong economic recovery. Further, the bank has reported better than expected results over the last three quarters. 

Capital One reported total revenues of $7.1 billion, which was 2% lower than the previous year. This could be attributed to a 3% y-o-y drop in net interest income driven by a drop in outstanding loan balances and a lower interest rate environment, partially offset by a 5% increase in non-interest revenues. Additionally, COF’s adjusted net income figure increased from -$1.4 billion to $3.2 billion on a year-on-year basis, mainly due to a significant drop in provisions for credit losses – it released $1.6 billion in reserves for loan losses in the quarter.

Capital One’s revenue of $28.5 billion for the full year 2020 was marginally lower than the 2019 figure. The net interest income (NII) of all the banks with sizable loan portfolios suffered in 2020 due to a decline in new loan issuance and a lower interest rate environment, and Capital One was no exception. Its NII reduced by 2% y-o-y, almost offset by a 7% y-o-y growth in non-interest income. The non-interest revenues benefited from an unrealized valuation gain of $535 million on an equity investment in Snowflake Inc. However, if we exclude the impact of unrealized valuation gain, the non-interest income was down on a year-on-year basis. That said, we expect NII to continue to suffer in FY2021, due to the lower interest rates, which are unlikely to see an immediate revival to the pre-Covid-19 levels. While we expect the outstanding loan balances to improve in the year due to recovery in consumer spending levels, it is unlikely to see significant growth. Overall, Capital One’s revenues are likely to remain around $28.6 billion in FY2021.

Additionally, the bank has a sizable loan portfolio of more than $250 billion (as per 2020 data). Due to the Covid-19 crisis and the economic slowdown, the loan default risk increased in 2020, leading to a build-up in provisions for loan losses from $6.2 billion to $10.3 billion. This negatively impacted the net income figure, which declined by 50% y-o-y to $2.7 billion. However, the bank has reduced its provisions over the recent quarters, signaling some recovery in the loan default risk of its customers. Further, we expect it to see a favorable decrease over the subsequent months, with improvement in the economy. This will likely result in an EPS of $14.89, which coupled with a P/E multiple of just below 11x, will lead to the valuation of $157.

[Updated 02/08/2021] Does Capital One Stock Have More Upside?

Despite more than a 150% rally since the March 23 lows of the last year, we believe that Capital One stock (NYSE: COF) still has some upside potential. Trefis estimates Capital One valuation to be around $126 per share – about 10% above the current market price. Capital One, the credit card giant, reported better than expected revenues and earnings in the recently released fourth-quarter results. Its revenues of $7.3 billion were marginally lower than the previous year. This could be attributed to a 3% y-o-y drop in net interest income due to interest rate headwinds, partially offset by an 8% increase in non-interest revenues. Further, its profitability improved in the quarter both in terms of a year-on-year and sequential basis, due to lower provisions for credit losses.

Capital One derives close to 80% of its revenues from net interest income. Hence, the credit card giant is very sensitive to changes in interest rates. Further, consumer spending levels have a direct impact on outstanding loans and card purchase volume, affecting its top-line. The interest rates suffered in 2020 due to the zero rate policy by the Federal Reserve in response to the Covid-19 crisis. Similarly, the consumer spending levels suffered in the first two quarters due to the pandemic and economic slowdown, before improving over the last two quarters. Altogether, the above factors restricted Capital One revenues in 2020 to $28.5 billion – marginally lower than the year-ago period. That said, the consumer spending levels are likely to further recover over the coming months. This coupled with the mass availability of the Covid-19 vaccine and improvement in economic conditions will likely benefit the company’s top-line, enabling Capital One revenues to touch $29 billion in FY 2021.

Capital One’s profitability has taken a hit in 2020, due to significant build-up in provisions for credit losses – operating income decreased from 24% in 2019 to just 11.2% in 2020. Due to the Covid-19 crisis, the loan repayment capacity of its customers has suffered in the past year. Hence, the company increased its provision for credit losses to neutralize that risk – from $6.2 billion to $10.3 billion for the full year 2020. As a result, the adjusted net income figure declined by 54% on a year-on-year basis, leading to the EPS of $5.18. However, as the economy moves towards normalcy, provisions for credit losses are likely to see some decrease. The same was evident in fourth-quarter 2020 results, where the company released a loan reserve of $593 million. Additionally, Capital One is expected to re-start its share repurchase program in 2021. This will likely enable the EPS figure to touch $11.92 in the current year. Overall, the EPS of $11.92 coupled with the P/E multiple of just below 11x will lead to a valuation of around $126.

[Updated 11/16/2020] Capital One Stock Is Trading Close To Its Fair Value

Capital One stock (NYSE: COF) has gained 107% since the March bottom and at its current price of $89 per share, it is 5% above its fair value of $84 – Trefis’ estimate for Capital One’s valuation. The credit card giant recently released its third-quarter results, outperforming the consensus estimates for both revenues and earnings. The company reported revenues of $7.4 billion – 6% more than the previous year. This could be attributed to a 49% y-o-y jump in Non-Interest Revenues, partially offset by a 3% decrease in Net Interest Income. Further, the provision for credit losses increased to $10 billion for the nine months as compared to $4.4 billion in the year-ago period, mainly due to expected losses on outstanding loans.

We expect the company to report $27.4 billion in revenues for 2020 – around 4% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to see some improvement in the last quarter, improving the company’s business prospects over the coming months. However, the net income for the year is expected to suffer due to a significant build-up in provisions for credit losses, reducing the EPS figure to -$1.30 for FY2020. Thereafter, Capital One’s revenues are expected to improve to $28.4 billion in FY2021, mainly driven by growth in outstanding loans. The net income margin is likely to improve due to a decline in provisions for credit losses, leading to an EPS of $7.64 for FY2021. This coupled with a P/E multiple of around 11x, will lead to the valuation of $84.

[Updated 10/16/2020] Up 50%, Capital One Stock Still Has 20% Upside

Capital One stock (NYSE: COF) lost more than 58% – dropping from $103 at the end of 2019 to around $43 in late March – then spiked around 53% to around $66 now. Despite the recent rally, the stock remains 36% below the level at the beginning of the year.

This can be attributed to 2 factors:  The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plummeted. As the company derives most of its revenues from the credit card business, it could suffer losses due to lower consumer demand and an expected spike in loan default rates. The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.

But this isn’t the end of the story for Capital One’s stock

Trefis estimates Capital One’s valuation to be around $78 per share – around 20% above the current market price – based on an upcoming trigger explained below and one risk factor.

The trigger is an improved trajectory for Capital One’s revenues over the second half of the year. We expect the company to report $27.5 billion in revenues for 2020 – around 4% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. The easing of lockdown restrictions in most of the world is likely to help consumer demand, resulting in higher card loans and growth in transaction volume – the credit card business constitutes around 64% of the company’s total revenues. This, in turn, would benefit the revenue trajectory over the coming months. On the flip side, net income for the year is expected to take a hit due to build-up in provision for credit losses, reducing the EPS figure to -$2.17 for FY2020.

Thereafter, Capital One’s revenues are expected to improve to $28.2 billion in FY2021, mainly driven by growth in outstanding loans. Further, the net income margin is likely to improve as compared to the previous year due to a decline in provisions for credit losses, leading to an EPS of $7.20 for FY2021. 

Finally, how much should the market pay per dollar of Capital One’s earnings? Well, to earn close to $7.20 per year from a bank, you’d have to deposit about $785 in a saving account today, so around 110x the desired earnings. At Capital One’s current share price of roughly $66, we are talking about a P/E multiple of just above 9x. And we think a figure closer to 11x will be appropriate.

That said, consumer finance is a risky business right now. Growth looks less promising, and near-term prospects are less than rosy. What’s behind that? 

Capital One has a huge portfolio of outstanding loans – around $247 billion in FY2019 out of which close to $114 billion were in credit card loans alone. The economic slowdown is likely to hurt the financial health of many customers, exposing the company to potential loan defaults.

As a result, Capital One has increased its provisions for loan losses to around $9.7 billion by Q2 2020– more than three times the year-ago period, leading to a huge spike in the total expenses figure for the year. If the economic condition continues to deteriorate, this figure could further spike in the subsequent months. 

The same trend is visible across Capital One’s peer – American Express. Its revenues are likely to suffer in FY2020 due to lower consumer spending. Further, its net income margin is likely to suffer due to a jump in provisions for credit losses in anticipation of loan defaults. This would explain why American Express’ stock currently has a stock price of over $96 but looks slated for an EPS of around $6.66 in FY2021.

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[1] Month-to-date and year-to-date as of 2/10/2022
[2] Cumulative total returns since the end of 2016

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