Capital One (COF) Q4 Capital Income Outperformed on Credit, Shares Down 2.6% – 26 January 2022

capital one‘S (COF Free report) for the fourth quarter of 2021, earnings of $5.41 per share easily beat Zacks’ consensus estimate of $5.14. Bottom line improved 2% from the adjusted figure for the year-ago quarter.

Results benefited from a solid increase in loan balances, which supported net interest income and margin. Higher consumer confidence supported credit card business and noninterest earnings.

However, an increase in operating costs has been a headwind. During the quarter, the company recorded a provision for credit losses. Perhaps these were the main reasons behind investors’ bearish sentiment, as COF shares fell 2.6% in after-hours trading.

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

In 2021, adjusted earnings per share of $27.11 exceeded consensus estimate of $26.64 and marked a significant improvement from $5.79 in 2020. Net income available to common shareholders (GAAP basis) was $12 billion, or $26.94 per share, a significant increase from $2.38 billion, or $5.18 per share, in 2020.

Income and expenses increase, loan balances increase

Total net income for the quarter was $8.12 billion, an 11% increase over the same quarter last year. Sales also beat Zacks’ consensus estimate of $7.93 billion.

In 2021, total net sales grew 7% to $30.44 billion. Sales also beat Zacks’ consensus estimate of $30.25 billion.

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

The net interest margin increased 55 basis points (bps) to 6.60%. This was primarily due to lower interest rates on interest-bearing debt, higher yields and average card balances, and a decrease in average cash balances.

Noninterest income of $1.67 billion increased 14%. This was primarily due to growth in net interchange fees (up 23%) and service and other customer-related fees (up 29%).

Noninterest spending was $4.68 billion, up 17%. The increase was primarily due to a 77% increase in marketing spend. Adjusted spend increased 16% to $4.68 billion.

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

As of December 31, 2021, loans held for investment were $277.3 billion, up 6% sequentially. Total deposits for the same date grew 2% to $311 billion.

Credit Quality: A mixed bag

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

However, the 30-day overage rate declined 16 basis points to 2.25%. The net depreciation rate fell 59 basis points year-on-year to 0.79%. The allowance as a percentage of reported loans held for investment was 4.12%, down 207 basis points.

capital ratios deteriorated

As of December 31, 2021, the risk-based Tier 1 capital ratio was 14.5%, compared to 15.3% a year earlier. 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 completes the company’s $7.5 billion buyback authorization.

Our view

Capital One’s strategic acquisitions, increasing demand for consumer credit and continued improvement in the card business positions the company well for long-term growth. However, rising spending remains a major problem in the short term.

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

Performance and Yield Date Other consumer credit providers

ally finance‘S (ALLIES Free Report) in the fourth quarter of 2021, adjusted earnings of $2.02 per share exceeded Zacks’ consensus estimate by one cent. The bottom line showed a 26.3% increase from the figure for the same quarter last year.

Results benefited primarily from an improvement in revenues and higher loan and deposit balances. However, an increase in expenses and higher provisions weighed on Ally Financial’s results to some extent.

credit acceptance company (CACC Free Report) is scheduled to report fourth-quarter and full-year 2021 results on January 31.

For the past 30 days, the Zacks consensus estimate for quarterly credit acceptance earnings has been stable at $12.72. This corresponds to an increase of 34.9% compared to the same quarter of the previous year.

Enova International (ENVA Free Report) is scheduled to release fourth-quarter and full-year 2021 results on February 3.

For the past 30 days, the Zacks Consensus estimate for Enova International’s quarterly earnings has remained unchanged at $1.14. This means a decline of 52.3% compared to the same quarter of the previous year.

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