Capital One (COF) Up 5% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Capital One Financial CorporationCOF . Shares have added about 5% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Capital One Q4 Earnings Lag

Capital One Financial's fourth-quarter 2016 earnings of $1.45 per share lagged the Zacks Consensus Estimate of $1.60. Also, it compared unfavorably with the year-ago quarter's earnings of $1.58.

Lower-than-expected results were due to a fall in non-interest income, an increase in provisions and rising expenses. Capital and profitability ratios continued to weaken; while credit quality deteriorated further. However, higher net interest income and easing margin pressure supported the results to some extent.

Net income for the quarter came in at $791 million, down 14% from the quarter.

For 2016, earnings of $6.89 per share significantly lagged the Zacks Consensus Estimate of $7.30 and were below the 2015 figure of $7.07. Net income amounted to $3.75 billion, down 7% year over year.

Rise in Net Interest Income Supported Results

Net revenues totaled $6.57 billion, up 6% year over year. However, the figure was below the Zacks Consensus Estimate of $6.61 billion.

For 2016, net revenues grew 9% from the prior year to $25.50 billion. Nonetheless, it marginally missed the Zacks Consensus Estimate of $25.55 billion.

Net interest income rose 10% from the prior-year quarter to $5.45 billion. Further, net interest margin expanded 6 basis points (bps) year over year to 6.85%.

However, non-interest income declined 9% year over year to $1.11 billion. The decrease was mainly due to fall in service charges and other customer-related fees, and other income.

Non-interest expenses of $3.68 billion were up 6% from the year-ago quarter. All cost components, except amortization of intangibles, rose year over year.

Moreover, efficiency ratio improved to 56.03% from 56.18% recorded in the year-ago quarter. A decrease in efficiency ratio indicates enhanced profitability.

Worsening Credit Quality

Net charge-off rate rose 52 bps year over year to 2.48%. Also, provision for credit losses surged 27% from the year-ago quarter to $1.75 billion.

Moreover, the 30-plus day performing delinquency rate advanced 24 bps year over year to 2.93%. Likewise, allowance, as a percentage of reported loans held for investment was 2.65%, up 42 bps year over year.

Profitability & Capital Ratios Weaken

Return on average assets of 0.91% as of Dec 31, 2016 was down from 1.12% as of Dec 31, 2015. Return on average common equity edged down to 6.48% from 7.36% in the prior-year quarter.

As of Dec 31, 2016, Tier 1 risk-based capital ratio decreased to 11.6% from 12.4% as of Dec 31, 2015. Furthermore, total risk-based capital ratio was 14.3%, down from 14.6% as of Dec 31, 2015.

Moreover, common equity Tier 1 capital ratio under Basel III Standardized Approach was 10.1% as of Dec 31, 2016, down from 11.1% as of Dec 31, 2015.


Management noted that portfolio "growth math" had peak impact on charge-off rates in 2016. However, it now estimates the impact to moderate in 2017, particularly in the second half of the year. Beyond 2017, growth math is likely to have a modest effect.

For full-year 2017, domestic credit card charge-off rate is expected in the mid-4 with quarterly variability.

Management foresees growth opportunities in domestic card business. Also, it remains pleased with the earnings profile and resilience of the auto business. The underwriting assumption includes a decrease in used car prices. It remains focused on resilient originations and expects a gradual decline in margins and an increase in charge-offs. Also, management expects upward pressure on the auto charge-off rate owing to accounting treatment of bankrupt accounts.

Several factors are likely to affect Consumer Banking performance. While the home loans business continues to experience planned mortgage runoff, the auto finance unit will continue to witness modest decrease in margins and rise in charge-off rate.

Management projects near-term annual efficiency ratio (excluding adjusting items) in the 52s plus or minus a reasonable margin of volatility. Over the longer term, management remains optimistic to derive efficiency improvement driven by growth and digital productivity gains.

Considering growth over the last two years, management remains confident to deliver strong EPS growth in 2017. Revenues are projected to increase and will drive growth in pre-provision earnings.

How Have Estimates Been Moving Since Then?

In the past month , investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to six lower.

Capital One Financial Corporation Price and Consensus

Capital One Financial Corporation Price and Consensus | Capital One Financial Corporation Quote

VGM Scores

At this time, Capital One's stock has a subpar score of 'D' on both growth and momentum front. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.


Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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