On Sep 3, 2013, we downgraded our long-term recommendation on
Capital One Financial Corp.
) to Neutral from Outperform due to the persistent increase in
operating expenses. Though the company's second-quarter results
were positive, we are concerned about limited margin growth,
exposure to risky assets, and regulatory pressures.
Why the Downgrade?
Increasing operating expenses remain the primary concern for
Capital One. Though expense control initiatives have helped the
company offset higher credit losses in the past few years,
operating expense has still been continuously increasing.
Moreover, any considerable improvement in Capital One's credit
quality seems unlikely in the near future, given the still
sluggish economic recovery. While the credit performance of the
commercial loan portfolio appears to be stabilizing, net
charge-offs and nonperforming loans will likely fluctuate in the
near term due to the present economic instability and acquisition
HSBC Holdings plc
) U.S. credit card business.
Nevertheless, Capital One reported robust second-quarter earnings
which came ahead of the Zacks Consensus Estimate. Results were
driven by enhanced top line, partially offset by a rise in
operating expenses. Moreover, in May 2013, the company increased
its dividend by 500% to $0.30 per share.
The Zacks Consensus Estimate for 2013 advanced 4.0% to $6.82 per
share over the last 60 days. Further, for 2014, the Zacks
Consensus Estimate increased 1.6% to $6.80 per share over the
same time period. Capital One currently carries a Zacks Rank #3
Other Stocks Worth Considering
Some better performing banks include
Encore Capital Group, Inc.
). Both these carry a Zacks Rank #2 (Buy).
CAPITAL ONE FIN (COF): Free Stock Analysis
ENCORE CAP GRP (ECPG): Free Stock Analysis
HSBC HOLDINGS (HBC): Free Stock Analysis
SLM CORP (SLM): Free Stock Analysis Report
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