What to Watch for in 1 Bank's Earnings Report


In the third quarter, Capital One's stock price rose 8% while the broader KBW Bank Index was only up a little under half a percent. Could more gains be on the way?

With its third-quarter earnings release just weeks away, here are five things investors should look for to see if Capital One can continue to outpace its peers in the final quarter of 2013.

Source: Capital One.

Real revenue growth
While Capital One's net income has risen more than 30% through the first two quarters of 2013, a big reason for this is the result of its tremendous reduction in provision for credit losses, which are at levels less than half of what they were in the second quarter of 2012.

In fact, if you consider its revenue compared to U.S. Bancorp and PNC , all three banks' revenues remain relatively flat, as shown in the chart below:

Source: S&P Capital IQ.

Reductions in provision for credit losses and the resulting boost to the bottom line are certainly good things because it means the bank expects to lose less money on its outstanding loans, but gains in top-line revenue would be nice to see from Capital One.

1 metric that needs to stop moving the wrong way
While its net income has been on the rise, its tangible book value per share (the money that is available to shareholders) actually fell earlier in the year. This could have simply been a onetime blip as Capital One increased its dividend from $0.05 to $0.30, but investors will need to see this number grow in the future.

Improving returns
Capital One has done a tremendous job at growing its return on average assets, and it now stands as one of the leaders among its peers:

Return on Average Assets

1Q 2013

2Q 2013

U.S. Bancorp



Capital One









Source: Company earnings reports.

While each bank improved its ROA from the first to the second quarter, it will be important to see if that rate of growth flattens and a baseline is established for Capital One.

For example, U.S. Bancorp has had a return on average assets between 1.62% and 1.70% for the last five quarters. Knowing a bank's ability to generate money from its asset base is essential to any valuation and you should keep an eye on Capital One's ROA to see if the bank can be consistent.

Delinquent customer trends
While the United States' delinquency rate on credit card loans has fallen from 2.9% to 2.5% over the last year, Capital One's has actually risen! (Cue the scary music.) Bank of America , which had a similar delinquency rate last year, has also experienced a downward trend in its rate in a big way:

Source: Company earnings reports and Federal Reserve Bank of St. Louis.

While Capital One's credit card business has vastly improved its profitability, as its interest yield moved up from 13.4% to 15.9% (by comparison, Bank of America's fell from 10% to 9.8%), it will be important to make sure that if the bank is taking more risk and having fewer customers pay their bills on time, it is compensated with greater returns.

If its delinquency rate rises and the profitability of its credit card business falls, it will be cause for concern for investors.

Mixing it up
Through acquisition and growth, Capital One now has a much more diverse revenue stream and is becoming less reliant on its credit card business. In 2010, this business accounted for 67% of its profits, and as of the last quarter, it stood at 53%.

At the same time, it has watched its commercial bank grow from 6% of total net income to 14% and its consumer bank grow from 27% to 33%.

Certainly, there are other things to look for when Capital One releases its earnings after the market closes on October 17, but these are the five important things to watch then.

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The article What to Watch for in 1 Bank's Earnings Report originally appeared on Fool.com.

Fool contributor Patrick Morris owns shares of Bank of America and U.S. Bancorp. The Motley Fool recommends and owns shares of Bank of America. It owns shares of PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published