Capital One puts credit risk worries to rest, delivers a strong quarter and new buyback
Capital One shares rose on Tuesday evening after the credit card issuer reported a sizeable quarterly beat, driven by improved credit quality performance. Revenue in the third quarter ended Sept. 30 increased 53% year over year to $15.36 billion, beating the LSEG-complied consensus estimate of $15.08 billion. Adjusted earnings per share increased 32% year over year to $5.95, exceeding the $4.37 estimate, LSEG data showed. This adjusted figure excludes a $1.12 after-tax diluted EPS impact tied to integration expenses, intangible amortization expense, and loan and deposit fair value market amortization related to the Discover acquisition. COF YTD mountain Capital One YTD Shares were trading up about 4% in extended trading Tuesday night to around $226 per share. The stock’s record close is $229.74 set on Sept. 18. Bottom line The biggest takeaway from the quarter was better-than-expected credit performance. Credit has become a hot topic in the market lately due to the notable collapses of auto parts manufacturer First Brands Group and the subprime auto lender Tricolor Holdings. A few regional banks also recently flagged bad loans tied to possible fraud. Since Capital One has a large exposure to the subprime market, some investors weren’t quite sure how its loans were holding up. The subprime market is usually the first to feel the pain of an economic slowdown. That’s why it was so important to see Capital One once again report strong credit metrics, with better-than-expected net charge-offs and provisions for credit losses, resulting in an allowance release of $760 million and a boost to earnings per share by almost $1. Provisions for credit losses are funds that Capital One sets aside to cover potential loan defaults – the higher the provisions, the worse the sign of credit quality. The $760 million reflected continued favorable credit performance but was partially offset by what the company called “emerging economic uncertainties.” 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 synergies 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 Beyond the scrutiny of credit metrics, the other focus of Tuesday night’s post-earnings conference call was $35 billion acquisition of Discover and its integration. The company is still in its early stages, but the initial results are encouraging, with all synergies on track. “As a result of years of strategic preparation, we have a wealth of opportunities today that put us in an advantageous position to grow and win in the marketplace as it continues to change dramatically,” CEO Richard Fairbank said on the earnings call. “To capitalize on these opportunities at this special moment, we need to make significant and sustained investments.” He added, “Our acquisition of Discover enhances and accelerates some of these opportunities, and, of course, brings new opportunities as well.” Our thesis remains that the Discover acquisition will improve Capital One’s earnings power and help re-rate its price-to-earnings multiple as the business model evolves to more closely resemble American Express. By the way, we can check one box off our thesis after the company revealed a huge new share repurchase authorization. We’re reiterating our buy-equivalent 1 rating and price target of $250. Deal outlook On the earnings call, Capital One provided a positive update on the progress of the Discover integration. Consistent with what we learned last quarter, the company expects integration costs to be “somewhat higher” than its previously announced target of $2.8 billion. On the synergy side, Capital One said it’s on track to hit its target of $2.5 billion of net synergies, which is made up of cost savings and revenue synergies generated by moving its debit business and some of its credit business onto the Discover network. Fairbank said the process of moving its Capital One debit business off external networks like Mastercard’s and onto the Discover network is “going well” and will largely be completed in early 2026. Revenue synergies are expected to ramp up in the fourth quarter and in early 2026. From an operating expense standpoint, Fairbank said they are making “good progress.” In terms of long-term strategy, Fairbank wants to win at the top of the credit card market and pursue heavy spenders. He understands that winning in this market requires a lot of sustained investment to create a great product and give customers access to great experiences and exclusive investments. In a nod to JPMorgan’s Chase Reserve and American Express’ Platinum card, Fairbank noted that its biggest competitors in the premium space have “hugely stepped up their levels of investment,” and he wants to do the same. Commentary Capital One’s domestic card portfolio saw its net charge-off rate decline 64 basis points year over year to 3.89%. Net charge-offs refer to the amount of debt a bank has written off as uncollectible, minus any recoveries – a decline is a good thing. “Our charge-off rate has been improving on a seasonally adjusted basis throughout 2025 following the trend of improving delinquencies that started in late 2024 and supported by strong recoveries,” Fairbank explained. Within its consumer banking business, auto net charge-offs were 4.99%, down 62 basis points from the prior year. The auto results should ease fears around Capital One, considering the First Brands and Tricolor bankruptcies. “There’s been a lot of noise in the subprime auto space pointing to rising delinquency rates. Our own performance in subprime auto has remained stable through this time,” Fairbank said. Capital One’s subprime auto exposure is holding up better than peers thanks to a decision it made a few years ago to scale back its auto lending. Fairbank said the company anticipated inflated credit scores, normalizing credit, and declining vehicle values. As for buybacks, we learned during conference season that management stepped up the repurchase program, and they did not disappoint. The company repurchased 4.6 million shares for $1 billion in the third quarter, a sizeable increase from the $150 million worth of stock repurchased in the second quarter. The company also announced a new authorization of up to $16 billion, representing nearly 12% of the company’s current market cap. The company didn’t provide explicit guidance on how quickly it will move through this program, but CFO Andrew Young said that it’s “reasonable to assume that we’ll be picking up the pace of share repurchases from here.” Capital One also boosted the quarterly dividend by 20 cents per share to 80 cents. This bump increases the dividend yield to about 1.5% from $1.11%. (Jim Cramer’s Charitable Trust is long COF. 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