Capital One’s earnings call
Capital One Financial’s (COF) management scheduled a conference call on October 22 to discuss third quarter earnings as well as provide guidance for 4Q15 and 2016. Earnings beat expectations and came in at $1.98 per share for the quarter, representing year-over-year growth of 5%. Overall, earnings were driven by solid revenue growth coming from the credit card business. Net interest margins rose by 17 basis points to 6.7%, driven by higher yields in the domestic cards business.
2016 outlook and performance review
The consumer banking business was worst hit due to low interest rates and this is expected to continue through 2016. The company highlighted how low interest rates are pressurizing returns in the deposits businesses and compressing margins. They expect this to continue in 2016, even if rates begin to rise. The company is also on track to “runoff” its mortgage portfolios according to plan. Continuing competitive pressures will lead to compression of margins in the auto loans business. These trends are expected to hit revenues in 2016.
The company also warned of “aggressive underwriting practices” by its competitors in the subprime loans business. This led to a loss of some contracts to these competitors. Capital One’s closest competitors are American Express (AXP), Bank of America (BAC), MasterCard, and Visa (V). These companies are well represented in the S&P 500 SPDR ETF (SPY).
Chief executive officer Richard Fairbank emphasized cost management and expects card growth to create positive operating leverage. The company’s digital investments in the card business are already providing savings and productivity gains. Read on for in-depth analysis of how Capital One is focusing on expense management.