Capital One Earnings: Stronger-Than-Expected Credit Results and Margin Expansion Drive Net Income

Narrow-moat-rated Capital One COF reported a good third quarter as credit costs came in lower than expected and pressure on the bank’s net interest margin moderated. Net revenue increased 6% from last year and 4% from last quarter to $9.4 billion. Meanwhile, net income increased 6% year over year to $1.8 billion, which translates to a return on tangible equity of 19.59%. As we incorporate these results, we do not plan to materially alter our $146 per share fair value estimate. We see the shares as undervalued.

Capital One’s net interest income increased 6% year over year and 4% sequentially to $7.4 billion. The increase in net interest income was entirely due to loan growth, which continues to be driven by the bank’s credit card receivables, which increased 16% from last year to $146.8 billion. On the other hand, auto loans and commercial loans both shrank 5% from last year. The bank is de-emphasizing these segments due to market conditions, and we expect its credit card portfolio to provide the bulk of loan growth for the foreseeable future.

This does provide a tailwind to the bank’s net interest margin as its loan mix shifts toward its higher-yielding credit card business. The bank’s NIM recovered sequentially to 6.7% from 6.5% last quarter, though it remains below the 6.8% reported in the prior-year quarter. Competition for deposits has been intense in 2023 as interest rates rose, creating headwinds for the bank’s NIM. That said, with the Fed nearing the end of its rate hikes this pressure will likely alleviate, leaving Capital One to benefit from its shifting asset mix.

While this does come at the cost of higher net charge-offs, credit costs were surprisingly tame during the quarter. Firmwide net charge-offs were 2.56% of total loans, up from 1.24% last year but down from 2.82% last quarter. Higher credit losses were most prominent in the bank’s credit cards, where net charge-offs rose from 2.17% last year to 4.42% but were effectively flat from last quarter.