Can Interest Income Rise Aid Capital One (COF) Q4 Earnings?

Capital One Financial Corporation (NYSE:COF) is slated to release fourth-quarter and full-year 2017 results on Jan 23, after market close. The company is expected to witness a rise in total net interest income (NII) on a year-over-year basis.

Driven by improving economy, purchase volume growth and seasonality, credit card loans (part of broader consumer loan portfolio) continued to increase during the fourth quarter. This, along with higher interest rates, is likely to support Capital One’s credit card NII.

Moreover, the acquisition of Cabela's Incorporated’s credit card operations, completed in September 2017, is expected to further aid credit card NII growth. The Zacks Consensus Estimate for domestic credit card NII for the quarter is $3.38 billion, which shows 9.4% year-over-year rise. Also, international credit card NII is projected to be $304 million, increasing 15.6% year over year.

Further, the Zacks Consensus Estimate for commercial banking NII of $594 million shows 5.1% growth on a year-over-year basis. Also, NII for consumer banking division is expected to be $1.52 billion, up 1.4% from the prior-year quarter.

Thus, we believe Capital One will report an increase in total NII for to-be-reported quarter.

Other Factors to Influence Q4 Results

Modest fee income growth: Capital One is expected to witness a rise in its fee income in the to-be-reported quarter. As the quarter is likely to show increased card usage, interchange fees (major part of its fee income) are expected to rise.

Marginal increase in expenses: Similar to the prior quarter, operating expenses are expected to trend upward in the fourth quarter. Specifically, marketing expenses will likely remain elevated with rising loan growth opportunities.

Asset quality to worsen: While improvement in card loans is leading to an increase in interest income, Capital One will continue to witness a rise in credit card delinquency rates. The company expects domestic credit card charge-off rate to be in the high 4-5% range in 2017.

Now, let’s have a look at what our quantitative model predicts:

According to our quantitative model, chances of Capital One beating the Zacks Consensus Estimate in the fourth quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP Filter .

Zacks ESP: The Earnings ESP for Capital One is -0.04%.

Zacks Rank: Capital One currently has a Zacks Rank #3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of an earnings beat.

Activities of the company in the fourth quarter failed to encourage analysts to revise earnings estimates upward. As a result, the Zacks Consensus Estimate for earnings for the quarter remained stable at $1.85 over the last seven days. However, the estimate reflects year-over-year improvement of 27.6%.

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Notably, considering the growth in the last two years, management remains confident about delivering EPS growth (excluding adjusting items) in the range of 7-11% for 2017.

Also, the Zacks Consensus Estimate for sales for the to-be-reported quarter is $7.12 billion, which indicates 8.5% growth from the prior-year quarter.