Another Great Quarter For Capital One

Summary:

• Capital One posted Q2 results showing nice net interest income growth and solid earnings.
• The company is seeing a slight uptick in credit metrics, but I don’t foresee any wild upward swing with the mixed bag economy we have.
• At under 1.5x book value, I will continue to dollar cost average my position.

Introduction

Capital One (NYSE:COF) has released the results for the half year, and the bank is continuing strong trends seen before. There is some fear that the recession and inflation will cause credit metrics to deteriorate, and while it seems they are on the increase, I believe it will be at a very slow pace. The bank is posting solid top-line growth and earnings while holding on to healthy customers. As stated in prior articles, I am still dollar cost averaging my long-term position when the bank is under 1.5x book value.

Second Quarter And Six Months

In Q2, Capital One continued the same trends in prior quarters. The bank is seeing strong revenue growth on the back of higher net interest margins and purchase volumes. Net interest income grew by 13% and 12% for the quarter and half year, respectively. This is due in part to Fed interest rate increases, which pushed net interest margins up 57 basis points this year so far. On top of this, Capital One is still seeing high purchase volume growth, with the year so far up 17%. So customers are spending more and at a higher price.

But as happened in the first quarter, net income declined. Net income saw a decrease from the prior year of 43% and 34% for Q2 and the half year respectively. This was solely due to the bank having positive provisions for losses – a very normal thing, by the way. The overshoot in reserves from the pandemic seems to have been weaned off, as the allowance ratio is now down to 3.88%. Capital One has increased provision for losses thing year due to the slight uptick in charge-off and delinquency rates.

These rates have slowly been raising from all-time lows. This year, the net charge-off rate is up 11 basis points, while the 30+ day delinquency rate has increased 13 basis points. These are small increases, but the trend of stable low rates seems to be reversing course. This may be true, but the rates are still at significantly low values, as the net charge-off rate is 1.15%, and the delinquency rate is 2.54%. This is a stark contrast to pre-pandemic rates of 2.53% and 3.74% each.

Overall, Capital One is performing wonderfully. Net interest income is growing, and the customer is very healthy. I believe the bank will see the credit metrics continue to slide back to normal, but very slowly. There is some fear that a recession is here, and high inflation may derail the customer base’s ability to pay. But the economy is very mixed right now. While it is a technical recession, and inflation is at 8.5%, the jobs report showed growth of 528,000 jobs and an unemployment rate of 3.5%. For a credit card centered bank, this means customers as a total are seeing increased costs but do have jobs. This is why I think the reversal in credit metrics will be slow and is not a worrisome factor.

Valuation

As of writing, Capital One trades at $115 per share right now. This is around a 6% increase from the monthly low of $106. At $115 per share, the bank has a P/E of 4.91x. Capital One also trades a price to book value and price to tangible book value of 0.87x and 1.31x. I think the company has been around fair value for a while now. The bank also offers a 2.13% dividend yield. I keep dollar cost averaging my position and bought shares at $108. I think the bank provides a great investment opportunity over the long-term below 1.5x book value.

Conclusion

For the half year, Capital One saw good top-line growth and solid earnings. While earnings have been down compared to the prior year, the provision for losses the bank is recording is normal for pre-pandemic times. While credit metrics are slowly trending upward, the customer base is still incredibly healthy. I believe this credit metric uptrend will be slow due to the mixed bag economy we have currently. Overall, the bank is performing great, and I am continuing to dollar cost average my position below 1.5x book value.

Disclosure: I/we have a beneficial long position in the shares of COF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.