Bank of America sends message on Capital One stock

Capital One Financial has been making strides in integrating Discover while investors remain keen on assessing if the acquisition can lead to accelerated growth and improved returns. According to recent monthly data, Capital One (COF) demonstrated robust credit performance in July, although the growth within its domestic card portfolio decelerated compared to the previous month.

In a note shared with TheStreet, Bank of America (BofA) analyst Mihir Bhatia maintained a Buy rating on Capital One, along with a price target of $253, indicating an 11.3% upside potential from the $227.34 share price at the time. Bhatia highlighted that July's operating metrics remained robust, emphasizing solid credit performance despite a slower growth rate in card balances.

By July, Capital One had amassed $258.9 billion in domestic credit card loans, as reported in a Securities and Exchange Commission filing. The portfolio's annualized net charge-off rate stood at 4.12%, while the 30-day-plus delinquency rate was 3.48%. Bank of America noted that domestic card loans surged by 1.92% compared to the previous year, a rate that had slowed down from the 2.58% growth observed in June.

Analysts project that card balances will expand by approximately 2% within the coming year. However, Bhatia does not anticipate a significant acceleration in growth until certain hurdles related to the Discover integration and associated borrow-out activities are overcome. Bank of America is forecasting an end-of-period increase in card loans by about 1% sequentially in the third quarter.

This deceleration in card growth coincides with Capital One's ongoing integration of the Discover, PULSE, and Diners Club International networks. Despite the slower growth in card portfolios, Bank of America remains optimistic about the credit quality improvements. Capital One's domestic card net charge-off rate declined by 26 basis points month-over-month in July, a decrease that surpassed the historical average of 20 basis points seen between 2013 and 2019.

Auto lending presented a more encouraging growth signal, with Capital One reporting $90.5 billion in auto loans in July, a net charge-off rate of 1.48%, and a 30-day-plus delinquency rate of 4.39%. This represents a 12.05% increase from the same period a year earlier, marking a notable acceleration from the 11.62% growth recorded in June.

Bank of America's positive outlook on Capital One is driven by anticipated expense synergies, substantial capital return potential, room for valuation appreciation, and a resilient cardholder base. The bank's $253 price target is predicated on a 10.5-times multiple of Capital One's estimated earnings per share for 2027. This multiple falls within the upper range of Capital One's historical multiple of 7 to 11 times earnings, but Bank of America believes the premium is justified by projected synergy realization, an optimistic credit outlook, buyback potential, and a strong cardholder base.

Despite these optimistic projections, there are still risks that could impact the outlook. Bank of America cautioned that weaker revolving credit growth, a sluggish economic recovery, and rising loan losses could adversely affect earnings and valuation. Additionally, cybersecurity and regulatory issues pose further concerns. For now, July's results highlight Bank of America's focus on enhancing credit trends and the potential benefits still forthcoming from the Discover integration, while acknowledging that Capital One's core card growth remains subdued.