Capital One Financial (New York stock market :COF) posted exceptional results for fiscal 2022, but trends in credit indicators overshadowed them. Credit metrics, especially charges and delinquencies, have been trending upwards. That being said, it seems to be just one return to normal, pre-pandemic levels. Charges and delinquencies have not yet exceeded pre-pandemic averages, so there is not too much to worry about yet. I added more to my position at around $100 per share, in the belief that the bank will see 2022-like results over the next few years.
Capital One still has a good performance this year. Net income increased 13%, fueled by 21% growth in interest income. This is due to the rise in rates over the past year. The net interest margin increased by 46 basis points this year and increased every quarter. The rate increase helped propel revenue growth, but Capital One also saw an 11% increase in purchase volume for the year.
But net income was down 41% from a year ago. Why is it? Well, the bank increased the loss provision from -$1.944 billion to $5.847 billion. But that is consistent with pre-pandemic levels. And despite the drop in net profit, it was still at $7.360 billion or $17.91 per share this year. All in all, another very strong year on the books for Capital One.
A clear trend in credit metrics
With 2022 showing strong results, the bank increased the provision for credit losses to build up a reserve, whereas just a few years ago it was trying to reduce the reserve after exceeding the losses related to the pandemic. So what has changed? A historically strong consumer has begun to weaken back to normal. This can be seen in the clear upward trends in chargeback and delinquency rates. In 2022 alone, the charge rate increased by 48 basis points, while the 30+ day delinquency rate increased by 80 basis points.
Although the trend clearly shows a slow deterioration in credit metrics, I don’t think it will persist in troubling territory. This appears to be a troubling trend at first glance, but the measurements are still well below normal times. With an imputation rate of 1.36% and an unpaid rate of 3.21%, there is still room with the 2015-2019 averages of 2.33% and 3.47%. The delinquency rate will need to be watched, but overall the bank is still in very good shape. On top of that, the provision ratio is nearly 2% higher than pre-pandemic levels, so excess provision for losses will not be a problem for revenue.
As of this writing, Capital One is trading around the price of $110. At this price, the bank is trading at a P/E of 6.14x. But financial companies are not better valued on earnings. Looking at the P/BV we have 0.80x and with a tangible book value of $86.11, 1.28x. With these two book value ratios, it looks like the company is pretty close to book value. I added to my position at less than $100 per share because I think that’s a good price compared to the average dollar cost.
While credit metrics have increased, Capital One is still performing better than in pre-pandemic times. Charge-off and delinquency rates have increased every quarter this year, but are still below average before 2020. I expect the bank to operate at normal levels, such as a credit loss provision of around 4-5 billion dollars per year, charge- arrears rates of about 2.5% and delinquency rates of about 3.5%. Therefore, I think at 1.28 times tangible book value, Capital One is trading at about fair value.