To The Moon

$Capital One(COF)$ is scheduled to report its third-quarter 2024 results on 24 Oct after market close.

In the last reported quarter, the results were negatively impacted by higher expenses and provisions. However, an increase in net interest income (NII), along with higher non-interest income, aided the results to some extent. Further, loan balances witnessed a sequential rise in the quarter, which was a positive.

COF earnings are expected to have witnessed a decrease on a year-over-year basis, while revenues are likely to have increased.

Earnings per share is expected to come in at $3.77.

Higher Expenses But Net Interest Income Increase Would Help Earnings

Better Net Interest Income

On 18 Sep, the Federal Reserve announced a 50-basis point rate cut for the first time since March 2020. This rate cut announcement might not have much significant impact on COF’s NII during the third quarter.

One thing to note is the inverted yield curve remained for the major part of the quarter. High funding costs are expected to have weighed on interest income.The overall lending scenario was decent in the quarter, with a steady demand for consumer loans.

We could see Capital One’s efforts to strengthen its card operations are expected to have provided some support. The consensus estimate for NII of $7.78 billion indicates 4.9% growth. The estimate for NII is pegged at $7.69 billion.

Expenses Increase Due to Marketing Costs

Capital One has been witnessing a persistent rise in expenses over the past several quarters because of higher marketing costs. The company’s investment in technology upgrades leads to higher costs.

These costs together with the ongoing inflation pressure are expected to have led to an increase in operating expenses.

COF is also faced with the pending acquisition of Discover Financial Services is expected to have resulted in some merger-related charges in the to-be-reported quarter. This would bring the total non-interest expenses estimate higher to $5.04 billion, implying a year-over-year increase of 3.8%.

Investigation Into COF Proposed Acquisition of Discover Financial Services

Something we might take note is the investigation by New York Attorney General on COF proposed acquisition of Discover Financial Services as the deal would have “significant impact” on consumers in the state.

The proposed deal would have Capital One and Discover with over $9.5 billion and $6.5 billion in credit card loans in the state respectively.

So if this deal were to drag further, the expenses would be higher as well, and considered that the credit card loans from this deal, is something we need to look at as well.

Capital One is expected to have set aside substantial money for potential bad loans, given the risks due to geopolitical and macroeconomic concerns. Estimate for provision for credit losses is pegged at $2.87 billion, indicating a 25.5% jump from the year-ago quarter.

Technical Analysis - MACD and Multi timeframe

The bearish MACD crossover recently might be a concern that investor confidence is not so positive, though we could see that net interest income has helped to reduce the impact brought by the increase in expenses in Q2 2024, but Q3, COF have an additional spending on the acquisition deal for Discover Financial services.

And we are seeing a downward movement on the stock price though it is still trading above the short-term and long-term MA, and MTF is also showing pretty much uptrend movement.

But I would think we need to be cautious to monitor the price action on COF in today’s trading session.

Summary

The main concern for COF is the operating expenses in the third quarter, there will be significant spending on the acquisition deal for Discover, and the credit card loans from Discover, if the deal goes through, we would need to see if COF have the ability to manage this debt, especially on the delinquency.

I would be watching the earnings closely on its expenses report as well as the outlook guidance on the Discover deal.

Appreciate if you could share your thoughts in the comment section whether you think Capital One could surprise in its earnings with a much better NII.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.