Summary
- Capital One Financial Corporation is one of the financial firms that are highly sensitive to economic trends and monetary policies due to its exposure to subprime borrowers.
- A 34% drop in its fiscal year 2022 earnings demonstrates that tight market conditions make it difficult for a consumer finance company to generate lofty earnings.
- COF’s earnings may suffer in the coming quarters as economic uncertainty and interest rate increases could potentially lead to a recession.
- The recent uptrend in its shares appears to be a bear market rally, as falling earnings and economic headwinds are expected to weigh heavily on its shares in the coming days.
A Capital One branch in Pearland, Texas, USA.
In one of the most difficult macroeconomic environments in a decade, Capital One Financial Corporation (NYSE:COF) does not appear to be a good stock to buy. Its stock, which has already lost nearly a quarter of its value in the past year, is expected to fall further because the larger-than-expected decline in the fourth quarter and fiscal 2022 earnings show that its business model is vulnerable to deteriorating credit conditions. Indeed, larger-than-expected growth in key indicators such as credit card delinquency, net charge-offs, and provision for reserves, which were largely responsible for 2022 earnings declines, is expected to worsen in 2023. This implies that Capital One’s earnings potential is likely going to suffer a serious setback in 2023, which could have a significant impact on its share price performance. Therefore, investing in a stock that is more likely to be negatively impacted by deteriorating market fundamentals doesn’t seem like a wise choice.
Consumer Finance Outlook Weakening in 2023
Average U.S. commercial bank credit card interest rate
Average U.S. commercial bank credit card interest rate (axios.com)
Consumer finance has been hit the hardest in the financial sector due to its sensitivity to the economic environment. In 2022, credit card interest rates rose at the fastest rate in history, reaching an all-time high of more than 19%, with further increases expected in 2023 as the Fed seeks to raise the federal funds rate to more than 5%. A high-interest rate could potentially affect both the demand for new credit and the risk of defaults. Aside from high-interest rates, slow economic growth, rising unemployment, and declining disposable income are all likely to have an impact on consumers’ repayment ability. This was clearly visible in the fourth-quarter results. The higher-than-expected decline in earnings for banking goliaths like Goldman Sachs (GS), Morgan Stanley (MS), and numerous others were caused in part by consumer finance. Goldman recorded a $972 million provision for credit losses, which was 50% higher than analysts expected, due to the risk of potential losses in its credit card and point-of-sale loan portfolios. Denis Coleman, Goldman’s CFO, stated during an earnings call that the bank is seeing “early signs of consumer credit deterioration.”
