We are maintaining our Neutral recommendation on Capital One Financial Corp. (COF) in the absence of any significant positive or negative catalyst. While we anticipate continued synergies from the company’s geographic diversification and resilience in almost all its businesses, rising marketing expenses and weak loan demand will remain the downside.
Capital One’s fourth quarter earnings from continuing operations of $1.53 per share were substantially ahead of the Zacks Consensus Estimate of $1.35.
Results for the quarter benefited over the prior-year quarter primarily from increased revenues and a lower provision for loan losses owing to improved credit performance. However, an increase in operating expenses was a headwind.
Although Capital One has commercial lending concentrations in the New York metropolitan area and Louisiana, it maintains a geographically diversified loan portfolio. Also, its acquisitions provide entry into new geographic markets. We think the absence of geographical concentration reduces the operating risk for the company.
As part of its transformation to banking, Capital One acquired Chevy Chase Bank in February 2009. Chevy Chase’s large retail presence in the Washington D.C. region has further expanded Capital One’s operational reach in this lucrative market.
Fundamentally, Capital One remains strong with respect to its credit card and banking businesses. U.S. Card continues to deliver strong returns on a risk-adjusted basis with continuous expansion in revenue margin. Despite an increasingly competitive deposit market, total customer deposits grew 5.5% year over year to $122.2 billion in 2010.
On the flip side, increasing non-interest expenses remain a key concern at this point. Though expense management initiatives have significantly helped the company in offsetting higher credit losses in the last few years, non-interest expense increased 7.0% year over year in 2010 due to increased marketing expenditures to grab opportunities in the gradually improving economy. Increasing marketing opportunities are expected to keep non-interest expenses elevated at least through 2011.
The financial reform law is expected to have more stringent capital, liquidity and leverage ratio requirements, thus limiting the company’s ability to pursue business opportunities, imposing additional costs and limiting fees.
Capital Onecurrently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Capital One’s rival card company American Express (AXP) also retains a Zacks #3 Rank.
AMER EXPRESS CO (AXP): Free Stock Analysis Report
CAPITAL ONE FIN (COF): Free Stock Analysis Report
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