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Muted Card Loan Growth to Hurt Capital One (COF) Q2 Earnings

Capital One COF is slated to report second-quarter 2020 results on Jul 21, after market close. Earnings and revenues in the quarter are expected to have declined on a year-over-year basis.

In the last reported quarter, the company recorded an adjusted loss per share of $3.02. Results were hurt by a drastic surge in provisions, lower interest rates and higher expenses.

Nevertheless, Capital One has a decent earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three and lagged in one of the trailing four quarters.

Capital One Financial Corporation Price and EPS Surprise
 

Capital One Financial Corporation Price and EPS Surprise

Capital One Financial Corporation price-eps-surprise | Capital One Financial Corporation Quote

Per the Zacks Consensus Estimate, the company will report a loss of $1.25 per share in the to-be-reported quarter. This compares unfavorably with earnings of $3.37 per share recorded in the year-ago quarter.

The consensus estimate for sales for the second quarter is pegged at $6.88 billion, which suggests a decline of 3.5% from the prior-year quarter’s reported number.

Before we take a look at what our quantitative model predicts, let’s check the factors that are expected to have influenced Capital One’s second-quarter performance.

Key Factors to Note

Net interest income (NII) growth likely to be muted: The Zacks Consensus Estimate for average earning assets for Capital One is pegged at $351.3 billion for the to-be-reported quarter, which indicates a decline of 1.1% from the prior quarter’s reported figure. Moreover, per the Fed’s latest data, consumer loan balances, specifically credit card loans, witnessed a decline in the second quarter.

While Capital One’s efforts to strengthen its card operations might have supported loan growth to some extent, the overall demand for credit card loans remained weak in the quarter due to the continued uncertainties related to the coronavirus pandemic.

Thus, because of muted growth in loans along with near-zero interest rates, the company’s NII is expected to have been negatively impacted. The consensus estimate for NII of $5.66 billion for the second quarter indicates a decline of 6% sequentially.

Fee income may not offer much support: With the expectation of a decline in card usage in the quarter, the company’s interchange fee (constituting more than 60% of fee income) is likely to have been negatively impacted. The Zacks Consensus Estimate for the same is pegged at $673 million, indicating a decline of 110.5% from the prior quarter’s reported number.

The consensus estimate for service charges and other customer-related fees (constituting almost 26% of fee income) of $338 million suggests 3.4% growth sequentially.

Thus, while a rise in service charges is expected to have provided some support, total fee income is likely to have declined in the quarter because of a fall in its most important component. The consensus estimate for total non-interest income of $1.16 billion suggests a decline of 5.6% sequentially.

Expenses likely to have been manageable: Operating expenses are likely to have been manageable in the to-be-reported quarter. While costs are expected to have increased to an extent because of the company’s investments in technology upgrades, a decline in overhead expenses (due to employees working from home) might have provided support.

Asset quality likely to deteriorate: The company is expected to have recorded an increase in provisions, taking into consideration the coronavirus outbreak-induced economic slowdown. The consensus estimate for net charge-offs is pegged at $1.80 billion for the to-be-reported quarter, indicating a marginal rise from the previous quarter.

Now, let’s have a look at what our quantitative model predicts:

Chances of Capital One beating the Zacks Consensus Estimate this time are less. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Capital One is -83.21%.

Zacks Rank: The company currently carries a Zacks Rank #3. While this increases the predictive power of ESP, we also need a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some finance stocks that you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

Associated BancCorp ASB is slated to release quarterly results on Jul 23. The company currently has an Earnings ESP of +7.31% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

East West Bancorp, Inc. EWBC is scheduled to report quarterly earnings on Jul 23. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +3.47%.

SVB Financial Group SIVB is also set to report quarterly earnings on Jul 23. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +6.71%.

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Capital One Financial Corporation (COF): Free Stock Analysis Report

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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.

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