Capital One Q1 Earnings Miss But Transformation Story Intact

Capital One Financial reported noisy first-quarter earnings, resulting in a top and bottom-line miss. That shouldn't take away from the transformation story that's unfolding. Revenue in the first quarter ended March 31 increased 52% year over year to $15.23 billion, missing the $15.36 billion consensus estimate of analysts surveyed by LSEG. Adjusted earnings per share increased 15% year over year to $4.42, missing the $4.55 estimate, LSEG data showed. Bottom line It was the second earnings miss in a row for Capital One, and this quarter, revenue also fell short. However, there are some puts and takes that explain why the stock isn't being punished more for the double miss. The top-line miss was driven by net interest income, where a 7.87% margin was below the estimate of about 8.2% and down from 8.26% in the fourth quarter. The company said the quarter-over-quarter decline was primarily driven by fewer days in the quarter, higher average cash balances, and lower average credit card loans. Non-interest income was better than expected, driven by a 2% quarter-over-quarter increase in net discount and interchange fees, which totaled $1.964 billion. This was what the bank earns on transactions, minus what it pays in fees to card companies like Visa and Mastercard . It's a good sign for the integration story that this figure keeps going up. Non-interest expenses of $8.46 billion were also an issue, higher than the $8.3 billion analysts expected, though the bank's figure included approximately $893 million of one-time Discover acquisition-related amortization and integration expenses. Backing those out, non-interest expenses would have been $7.58 billion, with marketing expenses noticeably down. These deal-related expenses are the messy part of the story, and the savings will become more apparent as the integration process nears its end next year. One way to assess the bank's expense performance is through its adjusted efficiency ratio. The efficiency ratio measures how much it costs a bank to generate a dollar of revenue, calculated as non-interest expenses divided by net revenue. Excluding certain adjustments, Capital One's efficiency ratio was 49.71%, which is better than 53.73% in the fourth quarter and 55.94% in the first quarter of last year. On the credit side, provisions for credit losses totaled about $4.1 billion, slightly worse than expected by analysts. These are funds that Capital One sets aside to cover potential loan defaults; the higher the provisions, the weaker the credit-quality signal. But it was about flat quarter-over-quarter, so it's not a bad sign. There was a $230 million reserve build in the quarter, primarily due to its auto-lending business. Management said the consumer was in good shape during the first quarter and has not seen a negative impact from higher energy prices on its credit and spending metrics, but that could change if energy prices remain higher for longer. COF 1Y mountain Capital One 1-year return Capital One stock is down about 2% to $198 in after-hours trading. You would think the sell-off would be worse considering the miss, but several analysts wrote in their pre-conference call flash notes that the numbers were good if you look past the noise. Capital One's integration of Discover and its $5 billion acquisition of Brex will keep operations in flux for several more quarters. But the silver lining is that these are the short-term pains of building a stronger company, and earnings estimates probably won't change much after tonight. We would be much happier shareholders if the efficiencies from the mergers were being realized faster, resulting in stronger earnings growth and bigger beats. That may be a few more quarters away, but in the meantime, we're still dealing with a stock that simply looks too cheap. Capital One trades at less than 10.5 times the consensus 2026 EPS estimate and 8.5 times the 2027 estimate. These are almost half the price-to-earnings multiple of American Express , and our thesis is that the discount will narrow as Capital One makes progress on its deals. We are reiterating our 1 rating on the stock but lowering our price target to $255 from $270 to reflect pressure on the credit card group. Why we own 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 expenses and network operational efficiencies that should make this deal highly accretive to earnings per share. Lastly, the acquisition strengthens Capital One's balance sheet, allowing for aggressive share repurchases in the future. Competitors : American Express , MasterCard , Visa Most recent buy : July 31, 2025 Initiated : March 6, 2025 Commentary Overall, the credit metrics were solid but not perfect. A $230 million reserve was built in the quarter, largely driven by its auto and commercial businesses. The $155 million build (money set aside to cover potential future losses) on the auto unit was driven by a slightly higher subprime mix and a modestly lower outlook for vehicle values. The $83 million commercial business build was mostly related to a small number of specific reserves in its real estate portfolio. The domestic card charge-off rate for the fourth quarter was 5.1%. That's down from 6.19% in the fourth quarter last year, but up from 4.93% in the fourth quarter. Net charge-offs are also known as recovery rates. You want to see these decline, but management said the quarter-over-quarter increase was in line with seasonality. Net charge-offs refer to the amount of debt a bank has written off as uncollectible, minus any recoveries. Within its consumer banking business, auto net charge-offs increased to 1.64% from 1.55% a year ago, and dipped from 1.82% in the fourth quarter. Retail banking net charge-offs increased to 5.99% from 4.75% last year, and dipped from 6.04% in the fourth quarter. For the segment, total consumer banking net charge-offs were 1.7%, representing a 10-basis-point increase year over year and an 18-basis-point decline from the fourth quarter. As for buybacks, the Brex deal (which closed in early April) hasn't changed the story. The company bought back 12.1 million shares for $2.5 billion. That's the same dollar figure as the fourth quarter. Capital One still has about $12 billion remaining under its share repurchase authorization, so we expect plenty of repurchases to continue through the year.