Capital One beat revenue and earnings forecasts and resumed buyback

Ticker: COF

Author: Stock Analyst  Date: 2021/04/28

Capital One Financial, an American diversified financial holding included in the top 10 largest banks in the country in terms of assets, presented its financial statements for the 1st quarter of 2021. Net income in January-March was $ 3.24 billion, or $ 7.03 per share, against a net loss of $ 1.38 billion, or $ 3.02 per share, in the same period last year. Note that the EPS indicator was significantly higher than the average estimate of Wall Street analysts at $ 4.2.

Capital One's quarterly revenue fell 1.9% year-on-year to $ 7.11 billion, but exceeded the consensus forecast of $ 6.9 billion. loans, as well as a 79 basis point decrease in net interest margin to 5.99% due to a general decrease in interest rates in the United States. Meanwhile, the bank managed to keep operating expenses under control, which increased by only 0.3% to $ 3.74 billion, which was facilitated, among other things, by measures to optimize costs.

The main driver of profit growth was a sharp drop in credit risk spending, which, in turn, was due to the release of provisions for possible losses on loans in the amount of $ 1.6 billion due to improved forecasts for the outlook for the global economy.

Capital One's assets at the end of the 1st quarter amounted to $ 425.2 billion, an increase of 7.1% in annual terms. The volume of issued loans dipped by 7.6% to $ 243.1 billion, while the credit card segment (-15.8% to $ 99.1 billion) and the corporate lending segment (-9.1% to $ 73.8 billion) became the driver of the decline. ). At the same time, the volume of auto loans increased by 9.3% to $ 67.1 billion. The volume of deposits for the year jumped by 15.1% to $ 310.3 billion. Asset quality improved slightly in the reporting period: the total volume of reserves to cover potential losses on loans amounted to $ 14.0 billion, or 5.77% of all loans issued, decreasing from $ 15.6 billion, or 6.19%, in the previous quarter. Nevertheless, the indicator is still significantly higher than the value at the beginning of 2020 ($ 7.21 billion, or 2.71% of the loan portfolio), when the coronavirus pandemic had not yet had a negative impact on the global economy.

The Tier 1 Capital ratio was a fairly high 13.7%, up from 13% in the prior quarter and 12.2% at the end of 2019.

During the reporting period, Capital One allocated about $ 185 million to pay out dividends. In addition, the bank resumed the buyback program, having bought 4.3 million of its own shares from the market for $ 490 million.

We assess the financial report of Capital One as generally good. The negative impact of the coronavirus pandemic continues to put pressure on the lender's revenue, while net income has skyrocketed thanks to the release of loan loss provisions. Moreover, both profit and revenue exceeded the market average forecasts. Capital One's current financial position looks solid. The CET1 capital adequacy ratio of 14.6% is well above the regulatory minimum of 10%, and the liquidity coverage ratio (LCR) is a substantial 139%.

We expect Capital One to be one of the main beneficiaries of the expected recovery in consumer and business activity in the United States, given the bank's strong position in the credit card and consumer banking segment. At the same time, due to the improved situation in the economy, further release of reserves for possible loan losses should be expected, which will provide additional support for profit indicators.

In the near future, we will adjust our Capital One valuation model and, accordingly, update the target price and recommendation for the bank's shares.