- Key insight: Capital One's third-quarter financials beat consensus analyst estimates as it continues to integrate its historic acquisition of Discover Financial Services.
- Supporting data: The company's net charge-off rate decreased, and credit card purchase volume rose 39% from the prior year.
- What's at stake: Capital One is now one of the few banks in the country with its own payment network, but it will take additional investments to fully capitalize on the advantage.
UPDATE: This story includes comments from the company's Tuesday earnings call and analyst notes.
Capital One Financial beat back investor fears around the strength of consumer credit, but also projected a short term "brown out" in loan growth, as the bank digests its historic acquisition of Discover Financial Services.
The McLean, Virginia-based bank exceeded analysts' expectations in its third quarter, but warned of temporarily stunted growth while it trims the Discover portfolio, especially of high-balance debtholders and lower-credit-score borrowers.
Capital One will also need to make "significant" investments, Chairman and CEO Rich Fairbank said on a Tuesday call with analysts. While he didn't provide specific numbers, he said the company would spend more on technology, like artificial intelligence, to take advantage of opportunities in "new growth vectors," such as shopping, travel and auto lending.
"I am struck by the opportunity all around us, but I also know what it took to get here. And that was investing what it takes to be in a position to win," Fairbank said. "Our opportunities are many and they are large, but so too is the investment to get there. But these investments will also be the basis for our sustained growth and strong returns over the longer term."
Fairbank added that even with the loan growth "brown out" and the investment plans, the company's "earnings power" on the other side of the Discover integration is "consistent with what we assumed at the time" of the announcement.
Capital One's investors have been mostly bullish on the company's opportunities as it digests Discover. The bank's stock is up some 28% since it won regulatory approval for the transaction.
"Overall it seems like revenues, credit and capital are all coming in better than expected, so it gives them the flexibility to invest more today (and hopefully produce more opportunities tomorrow)," said Brian Foran, an analyst at Truist Securities, in a note after the earnings call.
Following the company's earnings announcement, its share price was up about 3.7% on Tuesday after the market closed.
The $662 billion-asset bank logged net income of $3.2 billion, or $4.83 per diluted common share, in the third quarter, topping the consensus analyst estimate of $4.36.
The bank's purchase volume growth in the quarter was up 39%, driven primarily by the addition of Discover. Excluding Discover, purchase volume rose by about 6.5%. Ending loan balances increased 70% from the prior year including Discover, but just 3.5% without the acquisition.
Capital One reaffirmed its previous estimate to deliver $2.5 billion in combined synergies through the Discover integration. Fairbank said the bank should ramp up revenue synergies in the fourth quarter and be "largely completed" in early 2026, as it moves its debit card business to the Discover payment network. Capital One is also steadily phasing in platform conversions to take advantage of cost-saving synergies.
Fairbank has long preached about the benefit of owning a payment network. He said Tuesday that the Discover platform "is a rare and valuable asset, but it is very sub-scale in a scale-driven business."
Capital One will continue to move card volumes onto the network, but will also invest more in international card acceptance and the network brand. Fairbank said the company's fourth-quarter marketing costs will be "above recent seasonal patterns."
Costs related to the Discover integration, including intangible amortization expenses and loans and deposit fair value market amortization, increased from $639 million in the second quarter to $951 million in the third quarter.
Erika Najarian, an analyst at UBS Securities, wrote in a note earlier this month that investors had been tapping the brakes on Capital One's stock recently due to delayed clarity on share repurchase and capital targets, the company's plan for "accelerated investment spend" and general concern about consumers' resilience.
While Capital One reinforced its guidance that it will increase spending, albeit still in vague terms, its sunny outlook on the consumer seems to have assuaged investors.
The bank logged fewer net charge-offs in the third quarter, and it released $760 million of allowance for losses due to "recent favorable credit performance."
Plus, the company announced a capital management plan has begun to address some of the uncertainty, saying it is targeting long-term capital of 11%, compared with its current Common Equity Tier 1 ratio of 14.4%.
Capital One also said Tuesday that its board recently approved a plan to repurchase up to $16 billion of shares, following the buyback of 4.6 million common shares for $1 billion during the third quarter.
The company plans to increase its dividend to 80 cents per share, beginning in the fourth quarter, a 33% increase.
Behind the deal
Last quarter, the company reported a $4.3 billion net loss due to the expenses associated with the Discover acquisition. Fairbank said at the time that the costs of the integration would exceed the company's original $2.8 billion guidance, but also that the process was "off to a great start."
Capital One closed its acquisition of Discover in the spring after a 15-month process.
Fairbank has been resolute about the importance of gaining a payment network as part of the transaction.
"We are on the cusp of even greater opportunities down the road," he told analysts during the company's second-quarter earnings call. "These opportunities come both from this deal and also from Capital One's transformation to be at the frontier of a rapidly changing marketplace. These opportunities are exciting, but they will require significant investment to bring them home."
The deal had originally been valued at $35 billion, but Capital One said in the second quarter, and reiterated Tuesday, that the fair value price of the purchase when it closed in May was actually $51.8 billion.
