Will Competition Undo Capital One Financial Corp. (NYSE:COF) In 2016?

Capital One Financial Corp. (NYSE:COF) reported a solid 4Q2015 and fiscal 2015. The company’s top and bottom line figures surprised Wall Street. Despite Capital One beating earnings, some questioned continued to raise questions about the quality of its business in an increasingly competitive environment. There also seems to be confusion about whether the falling oil prices bode well or ill for the lender.

This Capital One analysis article brings out important details about the company to basically separate facts from myths to see what lies ahead for the company in 2016 and beyond. But first, here is a recap of COF’s most recent quarter and fiscal year report.

A solid quarter and year

Quarter: Capital One posted adjusted 4Q2015 EPS of $1.67, topping the consensus estimate of $1.61. Net revenue of $6.19 billion in the quarter rose 7% YoY and exceeded the consensus target of $6.08 billion.

Year: For the full-year 2015, adjusted EPS of $7.56 beat the consensus estimate by 2.6%. Revenue of $23.41 billion in the year rose 5% YoY and also surpassed the consensus target of $23.38 billion.

Major operation

Capital One Financial Corp. (NYSE:COF) reports revenue in three major segments namely Credit Card, Consumer Banking and Commercial Banking. The largest segment of the three is Credit Card, which generated revenue of $3.85 billion in the last quarter, followed by Consumer Banking at $1.62 billion of the revenue. Commercial Banking contributed $626 million of revenue.

Below are the segment revenues as captured in a chart:


What does the future hold for Capital One?

Looking at Capital One as a company and also compared to its industry, you get the impression that the company has multiple growth and profitability catalysts. As a company, Capital One is deliberately investing in long-term growth, particularly in marketing its cards business and building robust digital system.

In the industry, you see improving consumer appetite for business, which should drive up loan growth and revenue for a leading credit card company such as Capital One.

Demand for card loan remain strong

There are a number of economic factors that are lending support to card loan demand. For example, increase in incomes has boosted consumer appetite for and confidence in card borrowing. Capital One Financial Corp. (NYSE:COF) stands to benefit in the healthy card lending environment partly because of the cited favorable industry trends and company-specific efforts. In terms of company-specific strengths, Capital One’s aggressive card loan focused marketing campaigns are paying off as the company continues to take share from rivals. In 4Q, the company registered faster growth in card loan than all its major competitors. That drove domestic card loan growth to 13% to hit $88 billion in absolute dollar terms.

Healthy auto lending business

Capital One is a leader in the domestic auto lending market. The U.S. auto lending environment has largely remained attractive and Capital One has been taking advantage of the positive trends.

However, looking at the auto lending market also gives you the impression that rivals are working hard to disrupt Capital One’s growth with more aggressive offerings such as extended terms. In response, Capital One can be seen tackling the challenge through increased origination, which appears to be a great hedging strategy to try and stay ahead of the competition. However, there are risks in relying on auto loan originations to drive growth. For example, once origination growth slows, Capital One’s auto loan growth could also cool and intense competition means there is limited room for growth elsewhere.

The other risk in the auto lending market is not specific to Capital One but all other players in the segment. Presently, elevated prices of used vehicles are boosting gains for auto lenders. However, growth opportunities can significantly narrow if used vehicle prices come down, especially if the drop in prices is drastic.

How does crude price collapse impact Capital One?

It might seem like everyone is taking a beating from the falling oil prices, which are presently hovering around $30/barrel. The truth of the matter is that oil and gas companies are taking a serious beating and many of them have had to suspend dividends, cut workforce and put off capital projects all in the efforts to preserve cash. However, lenders are smiling, or at least, they should be smiling.

Many oil and gas companies are borrowing to fund operations and dividends to stay afloat and appease investors. While lending to businesses is an opportunity, the greatest opportunity for Capital One is in the consumer lending market. When oil prices are low, consumers are able to save more because of the lower prices of commodities. Moreover, lower prices of commodities also boost credit appetite for consumers. Capital One stands to benefit from an environment where consumers feel encouraged to use their credit cards.

Healthy card rewards business

Capital One Financial Corp. (NYSE:COF) is enjoying solid growth in credit card reward segment, primarily because of its straightforward benefits for the holders of its cards. Capital One credit cardholders get 1.5% cash back through a simplified and easy to understand format. The easy to understand reward model combined with aggressive marketing is behind Capital One’s gains in the card reward segment.

However, credit card rewards is a highly contested market. Citigroup Inc (NYSE:C) has a 2% cash back offer and Discovery has a more complicated 5% categories benefits. Each card provider is trying to impress customers with benefits. COF’s simple credit card reward format is presently helping Capital One grow its card rewards business at faster rate than most major competitors, the company faces risks if the competitors put revenue before profits with more aggressive card reward benefits.

Potential pressures for Capital One

Rising expenses

Capital One is in an investment mode as it seeks to defend and expand its card portfolio. The company is also investing in digital systems to stay ahead of peers and catch up with emerging consumer lenders such as PayPal Holdings Inc (NASDAQ:PYPL). These investments show a company planning well for the future. However, the investments will likely take a toll on near-term profit margins.

Intense competition

Given its leadership in various lending segments such as auto loans, Capital One is a target for many rival lenders. Intense competition card in 2016 is likely to drive up the company’s marketing and operating costs as it struggles to stay ahead of the competition.

Takeaway: Capital One Financial Corp. (NYSE:COF) plans to pay a quarterly dividend of $0.40 per share on Feb. 26, 2016. The dividend payout will capture shareholders of record as of Feb. 16, 2016.


The management of Capital One Financial Corp. (NYSE:COF) has demonstrated crisp execution and the results can be seen from the company’s leading position in auto lending and other areas. However, Capital One’s leadership doesn’t invite comfort, the company is increasingly become a target and execution pace and quality need to improve for the company to see more growth and profitability in its various segments.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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