Capital One (COF) Fourth Quarter Earnings Beaten on Loans, Shares Down 2.6%

Capital oneQ4 2021 COF earnings of $5.41 per share easily beat Zacks’ consensus estimate of $5.14. Net income improved by 2% compared to the adjusted figure for the quarter of the previous year.

Results benefited from a solid increase in loan balances, which supported net interest income and margin. Improved consumer confidence supported credit card business and non-interest revenue.

However, an increase in operating expenses was a headwind. During the quarter, the company recorded a provision for credit losses. These are perhaps the main reasons for investors’ bearish stance, as COF shares lost 2.6% after hours trading.

Net income available to common shareholders (GAAP basis) was $2.3 billion, down 7% from the prior year quarter.

In 2021, adjusted earnings per share of $27.11 exceeded the consensus estimate of $26.64 and was a substantial improvement from the $5.79 earned in 2020. Net earnings available to common shareholders ( under GAAP) was $12 billion or $26.94 per share, up significantly from $2.38 billion or $5.18. per share in 2020.

Income and expenses increase, loan balance increases

Total net revenue for the quarter was $8.12 billion, up 11% from the prior year quarter. The top line also beat Zacks’ consensus estimate of $7.93 billion.

In 2021, total net revenue increased 7% to $30.44 billion. Revenue also exceeded Zacks’ consensus estimate of $30.25 billion.

Net interest income improved 10% from the prior year quarter to $6.45 billion.

Net interest margin jumped 55 basis points (bps) to 6.60%. This was largely due to lower rates on interest-bearing liabilities, higher average card yields and balances, and a lower average cash balance.

Non-interest revenue of $1.67 billion increased 14%. This was mainly due to growth in net interchange fees (+23%) and service fees and other customer-related fees (+29%).

Non-interest expense was $4.68 billion, up 17%. This increase is mainly due to a 77% increase in marketing expenses. Adjusted spending rose 16% to $4.68 billion.

The efficiency ratio was 57.63% compared to 54.64% in the prior year quarter. An increase in the efficiency ratio indicates a deterioration in profitability.

As of December 31, 2021, loans held for investment were $277.3 billion, up 6% from the prior quarter. Total deposits, as of the same date, increased by 2% to $311 billion.

Credit quality: a mixed bag

Provision for credit losses jumped 44% year-over-year to $381 million.

However, the 30+ day default rate fell 16 basis points to 2.25%. The net write-off rate decreased 59 basis points year-over-year to 0.79%. The allowance, as a percentage of reported loans held for investment purposes, was 4.12%, down 207 basis points.

Capital ratios are deteriorating

As of December 31, 2021, the Tier 1 risk-based capital ratio was 14.5%, compared to 15.3% a year ago. The Common Equity Tier 1 capital ratio was 13.1% as of December 31, 2021, compared to 13.7%.

Share buyback update

During the quarter, Capital One repurchased 17 million shares for $2.6 billion. This completed the company’s $7.5 billion buyout authorization.

Our point of view

Capital One’s strategic acquisitions, increasing demand for consumer loans and continued improvement in the card business position it well for long-term growth. However, rising spending remains a major short-term concern.

Capital One Financial Corporation Price, Consensus, and EPS Surprise

Capital One Financial Corporation price-consensus-eps-surprise-chart | Capital One Financial Company Quote

Currently, Capital One carries a Zacks rank #2 (buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance and Earnings Date Other Consumer Loan Providers

Allied FinancialALLY’s fourth-quarter 2021 adjusted earnings of $2.02 per share beat Zacks’ consensus estimate by a penny. Net income showed a 26.3% increase over the number in the prior year quarter.

Results benefited primarily from improved revenues and higher loan and deposit balances. However, higher expenses and higher provisions hurt Ally Financial’s results somewhat.

credit acceptance company CACC is expected to release its fourth quarter and full year 2021 results on January 31.

Over the past 30 days, the Zacks consensus estimate for Credit Acceptance’s quarterly earnings has been flat at $12.72. This indicates a 34.9% increase over the prior year quarter.

Enova International ENVA is expected to release its fourth quarter and full year 2021 results on February 3.

Over the past 30 days, the Zacks consensus estimate for Enova International’s quarterly earnings was unchanged at $1.14. This indicates a decline of 52.3% from the prior year quarter.

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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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