Capital One (COF) Gains 1.3% as Q3 Earnings Beat Estimates

Shares of Capital OneCOF gained 1.3% following the release of third-quarter 2018 results after the market closed. Adjusted earnings of $3.12 per share easily surpassed the Zacks Consensus Estimate of $2.89. Also, it compared favorably with the year-ago quarter's adjusted earnings of $2.42.

Results benefited from rise in net interest income and strength in card business. Further, a decline in provision for credit losses and improving loans and deposits were the tailwinds. However, lower non-interest income and an increase in operating expenses hurt the results to some extent.

After taking into consideration the non-recurring items, net income available to common shareholders was $1.44 billion or $3.01 per share, up from $1.05 billion or $2.16 per share in the prior-year quarter.

Revenues Stable, Expenses Rise

Net revenues were $6.96 billion, relatively stable year over year. The figure beat the Zacks Consensus Estimate of $6.85 billion.

Net interest income grew 2% from the prior-year quarter to $5.79 billion. However, net interest margin decreased 7 basis points (bps) to 7.01%.

Non-interest income declined 8% year over year to $1.18 billion. The decrease was due to lower service charges and other customer-related fees and net securities losses, partially offset by rise in net interchange fees and other income.

Non-interest expenses of $3.77 billion were up 6% year over year, mainly owing to 33% jump in marketing costs.

Efficiency ratio was 54.19% compared with 51.07% in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.

Credit Quality: A Mixed Bag

Net charge-off rate decreased 20 bps year over year to 2.41%. Also, provision for credit losses declined 31% to $1.27 billion.

However, the 30-plus day performing delinquency rate increased 35 bps year over year to 3.28%. Likewise, allowance as a percentage of reported loans held for investment was 3.02%, up 8 bps.

Strong Loan and Deposit Balances

As of Sep 30, 2018, loans held for investment were $238.76 billion, up 1% from the prior quarter. Also, total deposits, as of the same date, were relatively stable sequentially at $247.20 billion.

Profitability & Capital Ratios Improve

Return on average assets was 1.66% at the end of the reported quarter, up from 1.28% in the year-ago quarter. Also, return on average common equity was 12.40%, up from 9.40% in the prior-year quarter.

As of Sep 30, 2018, Tier 1 risk-based capital ratio was 12.8%, up from 12.2% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 11.2% as of Sep 30, 2018, up from 10.7% as of Sep 30, 2017.

Our Take

Capital One's strategic acquisitions over years position it well for long-term growth. Further, steady improvement in card business will likely support profitability. However, increasing expenses remain a concern. Also, asset quality is likely to continue being 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 .

Performance & Earnings Release Dates of Other Consumer Loan Stocks

Sallie Mae SLM reported third-quarter 2018 core earnings of 23 cents per share, in line with the Zacks Consensus Estimate. Increase in net interest income, aided by rising rates, was a tailwind. However, these positives were offset by elevated expenses, poor credit quality and non-interest loss.

Ally Financial Inc. ALLY will report results on Oct 25, while Credit Acceptance Corporation CACC is slated to announce on Oct 29.

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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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