Capital One Faces Deteriorating Asset Quality, Rising Costs

On Sep 20, 2017, we issued an updated research report on Capital One Financial Corporation (NYSE:COF) . The company is currently facing deteriorating asset quality and continued rise in operating expenses. These are expected to keep the company’s bottom line under pressure in the near term. However, its top-line growth might alleviate some pressure.

The Zacks Consensus Estimate for current-year earnings has been revised nearly 1% downward over the past 60 days. Similarly, for 2018, earnings estimates have declined 1.4% over the last 60 days. The stock carries a Zacks Rank #4 (Sell).

Also, shares of Capital One have gained 1.8% over the past three months compared with 3.7% rally of the industry it belongs to.



Capital One’s asset quality has been deteriorating over the last couple of years, with both provision for credit losses and net charge-off rates witnessing a rise. The same trend continued this year as well. Credit quality is expected to remain under pressure due to losses in auto portfolio and U.S. card business.

Additionally, elevated non-interest expenses are a big concern for Capital One. Expenses have been mounting at a compound annual growth rate of 4% for the last five years (2012-2016), with the trend continuing in the first half of 2017. As the company continues to invest in franchise and grow inorganically, expenses are projected to remain elevated in the near term.

Nevertheless, revenue growth looks promising for Capital One driven by higher loan demand and acquisitions. Over the last few years, it acquired the online banking unit of ING Direct USA, HSBC Holdings (LON:HSBA) Plc’s (NYSE:HSBC) U.S. credit card business, Beech Street Capital and GE's healthcare unit. Further, in April 2017, it announced a deal to acquire Cabela's Incorporated’s (NYSE:CAB) credit card operations.

Stock to Consider

A stock worth considering in the same space is Credit Acceptance Corporation (NASDAQ:CACC) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 6.5% upward over the last 60 days. Further, its shares have gained 23.6% so far this year.

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