On Sep 1, 2016, we issued an updated research report on Capital One Financial Corporation COF. The company’s organic growth remains on track with continued economic recovery, though mounting expenses and weakness in credit quality remain headwinds.

Capital One has grown meaningfully from a credit card offering company to a major financial entity, expanding operations to include lending business. Solid business model, diversified products and services, and strategic acquisitions have aided the company in boosting top-line growth. Notably, revenues grew at 5-year (2011–2015) CAGR of 9.5%, with the momentum continued in the first half of 2016 as well.

The U.S. consumer finance industry remains healthy amid a declining unemployment and improving housing sector. Capital One, with strong brand recognition, continues to benefit from its robust credit cards business. The company’s Domestic Card business, which accounts for over 91% of the Credit Card net revenue,  12% year over year during the first six month of 2016. Management continues to project steady growth opportunities in this business.

Further, driven by a sturdy capital position Capital One remains committed to enhance shareholders’ value. In Jun 2016, its capital plan received the Federal Reserve’s approval which includes 2.5 billion share repurchase authorization to be carried out from the third-quarter 2016 to end of second-quarter 2017.

However, over the last few quarters, Capital One’s asset quality has been deteriorating. The delinquency rates and allowances could go up with a rise in loan demand. Notably, management anticipates domestic credit card charge-off rate in 2016 to be around 4% with quarterly seasonal variability driven by growth in loans.

Further, management projects persistent pressure on margins in its auto business owing to competitive pressure. Also, a prolonged low interest rate environment has been hurting deposit business. These are thereby expected to hurt Consumer Banking revenues in 2016.

Shares of Capital One gained 3% over the past six months.

CAPITAL ONE FIN Price

 

CAPITAL ONE FIN Price | CAPITAL ONE FIN Quote

Over the past 30 days, Zacks Consensus Estimate for 2016 declined slightly to $7.21 per share, while it remained stable at $7.91 for 2017.

Capital One currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some top-ranked stocks in the finance space include Cash America International, Inc. CSH , Enterprise Financial Services Corp. EFSC and Regional Management Corp. RM, each sporting a Zacks Rank #1 (Strong Buy).

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