Capital One puts credit risk worries to rest, delivers a strong quarter and new buyback
Capital One shares rose Tuesday evening after the credit card provider reported a significant quarterly increase, driven by improved credit quality performance. Revenue rose 53% year over year to $15.36 billion in the third quarter ended Sept. 30, beating the LSEG-compliant consensus estimate of $15.08 billion. LSEG data showed adjusted earnings per share rose 32% year over year to $5.95, beating the $4.37 forecast. This adjusted figure excludes integration expenses related to the Discover acquisition, intangible amortization expense, and the after-tax diluted EPS impact of $1.12 due to loan and deposit fair value market amortization. COF YTD mountain Capital One YTD Shares traded at around $226 per share, up nearly 4% in extended trading Tuesday night. The stock’s record close was $229.74 on Sept. 18. As a result, the biggest win of the quarter was better-than-expected credit performance. Credit has been a hot topic in the market lately due to the notable collapses of auto parts maker First Brands Group and subprime auto lender Tricolor Holdings. Several regional banks have also recently flagged bad loans linked to possible fraud. Because Capital One has a large stake in the subprime market, some investors weren’t quite sure how long the loans would last. The subprime market is usually the first to feel the pain of an economic slowdown. That’s why it was so important to see Capital One once again report strong credit metrics with better-than-expected net charge-offs and allowances for loan losses; This resulted in the release of a $760 million allowance and an increase in earnings per share of almost $1. Provisions for loan losses are funds that Capital One sets aside to cover potential loan defaults; The higher the provisions, the worse the credit quality. The $760 million reflected continued positive credit performance but was partially offset by what the company called “emerging economic uncertainties.” Why we have it Capital One’s acquisition of Discover is a transformative deal with significant strategic advantages and financial benefits. There are also several billion dollars worth of spending and network synergies that would make this deal highly accretive to earnings per share. Finally, the acquisition strengthens Capital One’s balance sheet, allowing for aggressive share repurchases in the future. Competitors: American Express, MasterCard, Visa Most recent acquisition: July 31, 2025 Started: March 6, 2025 Beyond examining credit metrics, the other focus of Tuesday night’s post-earnings conference call was the $35 billion acquisition and integration of Discover. The company is still in its early stages but initial results are encouraging and all synergies are on track. “As a result of years of strategic preparation, we have numerous opportunities today that position us advantageously to grow and win in a market that continues to change dramatically,” CEO Richard Fairbank said on the earnings call. “At this particular moment, we need to make significant and sustainable investments to take advantage of these opportunities.” “Our acquisition of Discover enhances and accelerates some of these opportunities and, of course, opens up new ones,” he added. Our thesis is that the Discover acquisition will increase Capital One’s earnings power and help re-rate its price-to-earnings multiples as its business model evolves to become more like American Express. In the meantime, we can check a box of our thesis after the company announced a major new share buyback mandate. We reiterate our 1 buy equivalent rating and $250 price target. Deal outlook On the earnings call, Capital One provided a positive update on the progress of the Discover integration. Consistent with what we learned last quarter, the company expects integration costs to be “slightly higher” than its previously announced target of $2.8 billion. On the synergy side, Capital One said it is on track to meet its $2.5 billion net synergy target, which consists of cost savings and revenue synergies from moving its debit business and a portion of its credit business to the Discover network. Fairbank said the process of moving its Capital One debit business from external networks like Mastercard to the Discover network is “going well” and will be substantially complete by early 2026. Revenue synergies are expected to increase in the fourth quarter and early 2026. In terms of operating expenses, Fairbank said they are making “good progress.” In terms of long-term strategy, Fairbank wants to stay at the top of the credit card market and go after high spenders. He understands that winning in this market requires a lot of ongoing investment to create a great product and give customers access to great experiences and exclusive investments. Hailing JPMorgan’s Chase Reserve and American Express’ Platinum card, Fairbank noted that its biggest rivals in the premium space have “dramatically increased their investment levels” and that it wants to do the same. Comment: Capital One’s domestic card portfolio’s net charge-off rate decreased by 64 basis points year-on-year to 3.89%. Net charge-offs refer to the amount of debt that a bank writes off as uncollectible, excluding collections; decline is a good thing. “Following an improving trend in delinquencies that began in late 2024 and is supported by strong recoveries, our charge-off rate improves on a seasonally adjusted basis through 2025,” Fairbank said. Automatic net charge-offs in the consumer banking business were 4.99%, down 62 basis points from the prior year. The auto results will ease fears about Capital One, given the bankruptcies of First Brands and Tricolor. “There is a lot of noise indicating that default rates are increasing in the subprime auto industry. Our performance in the subprime auto industry has remained stable throughout this period,” Fairbank said. Capital One’s subprime auto exposure is in better shape than its peers, thanks to its decision to reduce auto loans a few years ago. Fairbank said the company predicts credit scores will inflate, loans will normalize and vehicle values will decrease. As for buybacks, we learned during the conference season that management had stepped up the buyback program and it did not disappoint. The company repurchased 4.6 million shares for $1 billion in the third quarter; That’s a sizeable increase from the $150 million worth of shares repurchased in the second quarter. The company also announced new authorizations of up to $16 billion, representing approximately 12% of the company’s current market capitalization. The company hasn’t provided clear guidance on how quickly it will move forward with this program, but CFO Andrew Young said it’s “reasonable to assume we’ll increase the pace of share buybacks from here.” Capital One also increased its quarterly dividend by 20 cents per share, to 80 cents. This increase increased the dividend yield from $1.11% to approximately 1.5%. (Jim Cramer’s Charitable Trust is long COF. 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